3.7. Payment mechanisms

3.7.1. Paying for health services

Financial resource allocation between the integrated purchasers and providers in the hospital sector of the Danish health system has been subject to major changes during the last few decades. The Danish counties experienced massive budgetary deficits in the 1970s until the introduction of global budgeting in 1982, when prospective global budgets decided upon by the regional councils were introduced as the predominant method for allocating resources to hospitals. These budgets were usually based on past performance and modified when new activities were introduced, including changes in the distribution of tasks and changes in capacity.

The system of politically controlled global budgeting and contracts, combined with cost-containment efforts at the regional level, has proved to be an effective way of controlling expenditure on hospital services. However, the system provides limited economic incentives to increase efficiency at the point of service delivery and limited general incentives to increase activity if demand increases, which possibly contributes to waiting list problems for some treatment types. Finally, global budgeting encourages hospitals and departments to view their economic budget as a “right”. It also makes it difficult to establish whether the current resource allocation mechanism is efficient or not, or to reallocate resources between hospitals and departments. A number of different initiatives, at the national as well as the regional level, have been introduced to counter the perverse incentives associated with global budgeting – but the main element of global budgeting has been kept in order to keep the healthy effect of global budgeting on total costs.

During the 1980s and 1990s, after the introduction of global budgeting, the counties developed target and performance management within the global budgeting framework by including non-financial measures for clinical production (e.g. discharges, bed-days and the number of ambulatory visits) and service levels (e.g. standards for various measures of waiting time for patients or servicing GP) in budget assessments for hospitals and hospital departments. Some counties also wanted to include measures of clinical quality but did not succeed as the proposed measures (typically mortality and reoperation rates) were considered too simple and did not compensate sufficiently for differences in the case mixes between departments. These performance measures supplemented the global budgets, which continued to constitute the main component of the counties’ target and performance management system. The supplementary measures did not aim at introducing competition between hospitals, and little emphasis was placed on publishing the hospitals’ results to the public. This was probably because of fears that hospital administrations might manipulate performance data or that below-standard performances might create anxiety among voters and encourage patients to choose hospitals in other counties.

Initiatives to increase productivity were characterized by including still more performance measures in hospital budgets and/or by gradually introducing still more market-oriented steering mechanisms into the health care sector. Performance measures varied from county to county and, in some cases, even from hospital to hospital. Although hospital budgets are “soft” in the sense that they are not legally binding and do not include specific sanctions if targets are not achieved, persistent failure to fulfil a budget may result in replacement of managers. Another initiative to improve effectiveness was to delegate management and financial responsibility to lower levels (e.g. from hospital to department level). It was hoped that such initiatives would increase cost awareness and allow better utilization of information at each organizational level.

In the 1980s, many county politicians and managers were highly sceptical of activity-based financing, probably because their counties experienced massive and persistent deficits in the 1970s through the combination of unlimited demand for health care provided free at the point of delivery and very limited extra tax revenue gained by the public sector for treating a greater number of patients. A further reason may be that it would have been a major challenge for a single county to develop the infrastructure for activity-based financing (including the definition of DRGs and the calculation of the number of points associated with each DRG) on its own.

Activity-based financing was eventually introduced at the department and hospital levels in the 1990s by the national (centre-left) government as a typical “new public management” tool. The national government provided the necessary infrastructure (software). At the time of introduction, on 1 January 1999, activity-based financing hospitals were obliged to distribute 10% or more of each hospital’s budget through activity-based financing. Since then, the mandatory share of activity-based financing has been increased by national centre-right governments, at first to 20% by January 2004 and then to 50% by January 2007 (Table3.5). By 2010, two of the five regions on their own initiative distributed 70% of their hospital budgets through activity-based financing. These increases have meant that the financial consequences of production below a specified level (the individual department’s baseline) have become still stronger for the department over time, and it has thereby become more and more important for each department to avoid undershooting the so-called baseline, which is the clinical production (measured by DRG points) associated with the hospital department’s expected financial budget. These budgets are fixed through annual negotiations between the regions, hospital administrators and department managers. The procedure varies across the regions and by year.

Table3.5

The Danish DRG system was developed from the national health authorities from the Nordic system. DRG rates for inpatients and DAGS rates for outpatients (the Danish ambulatory grouping system (Dansk ambulant grupperingssystem)), are calculated once a year by the Ministry of Health, based on the hospitals’ accounts and production of health care services (Ministry of Interior and Health, 2011a). In 2011, the Danish DRG system included 678 DRG groups (648 in 2010) and 198 DAGS groups (161 in 2010). The logic in the grouping of services is validated by the medical societies.

Departments and hospitals that produce more DRGs than specified by their baseline will experience a rise in their income; however, there is a limit as to how much the extra income can exceed the income associated with the baseline. This model for activity-based financing combines the advantages of global budgeting with the advantages of activity-based financing. In order to promote efficiency and to compensate for the risk of “DRG creep”, the baseline is raised by several percentage points each year (the percentage differs by region), and if a hospital department exceeds the baseline, next year’s baseline may be increased by a certain share of the activity above the baseline.

3.7.2. Paying health workers

Most providers are financed through fee-for-service mechanisms in order to promote activity. Most fee-for-service mechanisms, however, involve upper limits to turnover to enable the regions to keep their expenditures within their budgets (see descriptions of the various providers in Chapter 5).

Salaries for health workers employed by the regions at hospitals, including doctors, nurses, midwives, physiotherapists, laboratory technicians, psychologists and so on, are negotiated by the Regions’ Board for Wages and Tariffs and the employees’ trade unions. The Board consists of a representative from each of the five regions (each of which must be a member of a regional council), two representatives appointed by Local Government Denmark (each of which must be a member of a municipal council), a representative of the Ministry of Finance and a representative of the Ministry of Health. Individual health workers with special competences and/or in short supply – medical specialists, particularly – may be able to achieve supplementary payments, but most health workers employed at hospitals are paid salaries calculated on the basis of the number of hours worked, with supplements for the number of hours worked out of hours. Consequently, the wages of individual health workers are independent of the clinical production and its quality and the service level at the department and the hospital.

Salaries for health workers employed by the municipalities, including nurses working in nursing homes or in home care and dentists working at school clinics, are negotiated between Local Government Denmark and the relevant trade unions.

Fees for GPs and professionals working as independent businesses are negotiated by the Board for Wages and Tariffs of the Regions and the professional organizations, such as the Organization of General Practitioners in Denmark. A region may enter into one or more supplementary agreements with representatives of the GPs working in the region on provision and payment of services not included in the national agreement.

GPs derive almost all of their income from the region in which their practice is situated. Their income is derived from a mixture of capitation, which makes up, on average, a third of their income, and fees for services rendered (per consultation, examination, out-of-hours consultation, telephone consultation, e-mail consultation, home visit, etc.), making up the remaining two-thirds. Fees paid directly by citizens for services not covered by the region (e.g. certificates documenting that the citizen is healthy enough for a driver’s licence to be renewed, some other health certificates and some vaccinations) constitute a small part of their income only. This combined fee system has evolved over the last 100 years. The Board’s (until 2007, known as the Association of County Councils) objectives when negotiating with the GPs include the creation of incentives for the GPs to treat patients themselves, rather than refer patients who could be treated in general practice to hospital, while, at the same time, providing economic security for the regions and remuneration for general services for which fees are not paid. While fees for service should increase GPs’ productivity and provide incentives to treat patients themselves rather than referring them to hospitals, capitation aims to compensate GPs for services not compensated by fees, thereby reducing the temptation for GPs to provide unnecessary treatment (“supplier induced demand”) in order to secure a sufficient income. In 1987, the Municipality of Copenhagen[5] changed from a mostly capitation-based system to the national combined fee system. As a result of this change, the volume of activities that were specifically remunerated increased and referrals to specialists decreased, in accordance with the objective (Krasnik et al., 1990). If a GP’s turnover exceeds the average turnover for GPs in the region by a certain percentage, the GP’s representatives in the region and representatives of the regional council may discuss the GP’s production, but the region cannot order the GP to reduce his or her turnover or activity or to pay back a proportion of the turnover. Therefore, the region’s cost control is much weaker than in the hospital sector, where the regions may unilaterally cut a department or hospital’s budget.

Practising specialists derive their income from fees paid by the regions for specific services described in the agreement between the Regions’ Board for Wages and Tariffs and the Danish Association of Medical Specialists. Practising specialists do not receive capitation. For each specialty, the agreement specifies a number of services and the fee associated with each service. Each service specified in the agreement is described in broad terms; the service’s content, indication and quality standards/indicators are not specified in detail in the agreement, providing room for interpretation of the agreement. If the specialist reaches a specified turnover, the fees for further services provided are reduced by 40%. Until 2008, the payment was reduced at two levels, by 25% at the first limit and by 40% at the second limit, in order to reduce the risk that actual costs exceed the region’s budget. However, in order to reduce waiting times at hospitals, the first limit was eliminated on the assumption that this would strengthen the specialists’ financial incentives to examine and treat patients, thereby reducing the pressure on hospital departments and the need for re-referral of patients to private hospitals. Little evidence is available on the relation between activity-based financing and production or on the relationship between activity-based financing and productivity, but the persistent challenges for the regions with regard to controlling costs in the primary sector may be interpreted as an indication that activity-based financing provides GPs and medical specialists with an incentive to increase their production.[6]

The agreements reached by the Regions’ Board for Wages and Tariffs with other providers such as physiotherapists, psychologists, chiropractors and dentists also specify fees and conditions for provision of services. The agreements do not include capitation fees.

It has proved very difficult for the regions to control costs to providers outside hospitals, probably for several reasons.

• The regions and the providers’ representatives are negotiation partners on an equal footing (at least formally). The regions cannot change the providers’ financial conditions unilaterally but must enter into a negotiation to reach an agreement, while they may unilaterally reduce hospital departments’ financial budgets or increase their activity budgets.
• A large share of the turnover of GPs and, particularly, medical specialists is derived from activity-based financing, making the regions sensitive to small changes in providers’ activity.
• GPs treat 90% of the patients showing up in their practice without referring them to hospital. Therefore, if the regions reduce the GPs’ financial incentive to treat patients themselves, the GPs may refer more patients to hospital. Even if the GPs refer only a small percentage more of their patients to hospital, the number of patients received by hospitals will increase by a much higher percentage.

GPs and other providers working independently employ secretaries and other supporting personnel, such as nurses or laboratory technicians, who are paid fixed salaries in accordance with agreements between employers’ associations and the relevant trade unions. It is the stated objective of the national government and the region to encourage GPs to employ more supporting personnel to enable GPs to concentrate on tasks that only medical doctors are authorized to perform.

The income of the proprietor pharmacist is determined by the pharmacy’s turnover, the pharmacy’s costs and the regulation by the state, which redistributes income from pharmacies with a relatively high turnover to pharmacies with a relatively low turnover. The association between the pharmacy’s and the proprietor pharmacist’s financial success provides proprietor pharmacists with an incentive to improve the pharmacy’s efficiency. Salaries for the staff in pharmacies, pharmacists and pharmaconomists (lægemiddelkyndig (pharmacy assistants)), are set through negotiations between employers’ associations and the relevant trade unions.

Alternative medicine is not regulated or provided by the national, regional[7] or local government, apart from acupuncture, which may be provided by some GPs and midwifes. Providers set their own fees and are financed through direct payments from patients.