Activity based payment in hospitals: Principles and issues drawn from the economic literature and country experiences

In 2005, France joined the ranks of most other developed countries when it introduced an activity based payment system to finance all acute care hospitals. Despite some basic principles in common, the design of these systems can vary significantly across countries. In order to understand better the issues raised by the new system in France, this paper examines the economic rationale for such a system, the key implementation decisions to be made and the challenges involved. The principle of paying hospitals according to their activity in relation to homogeneous groups of patients has some obvious advantages to improve efficiency and the transparency in health care financing. However, the literature and the experience of the other countries presented in this paper show that this mechanism of payment presents a certain number of risks and requires regular and careful adjustments to obtain the benefits expected of such a system. To ensure both the clinical and economic coherence of the classification used to define hospital activity, and to establish the corresponding level of tariffs, constitute two major challenges. The principle of paying a fixed price which is directly indexed on the average costs observed and which remains common to all types of hospitals has been increasingly subject to criticism. Furthermore, activity based payment, by its nature, can induce some perverse effects which requires complementary regulatory mechanisms to guarantee the quality of the care and equitable access. From the point of view of controlling health expenditure, it is equally important to follow closely the evolution of health care activity in different hospital settings, as well as in ambulatory care, since activity based payment may encourage hospitals to increase their activity by inducing greater demand for profitable services while shifting part of their costs towards medium/long-term care settings or to home-based or informal care.