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Optimal Contracts in the British NHS

One of the perennial questions of interest for health services researchers how to pay for health care.  A paper by Chalkley and McVicar (2008) examines this question in the contest of a reform in Britain’s National Health Service (NHS).

“After 1990 hospitals, which had previously been under the direct control of Health Authorities, could apply for NHS Trust status whereby they would be given discretion over employment, remuneration scales and the disposal of assets. This discretion was subject to limits and reservations and could ultimately be revoked if the appropriate authority, in this case the Secretary of State for Health, deemed their actions to be against the ‘public interest’.”

There are three types of payment contracts between the NHS and health authorities.  The first is a block contract where hospitals receive a flat contract to care for a patient population regardless of the actual care given.  The second contract is a cost-per-case contract where the hospital is paid based on the cost of the medical services supplied.  Volume contracts similarly base payment on the quantity of care provided.  The final contract is a sophisticated block contract.   This is similar to the simple block contract but requires the NHS to monitor the hosptials to ensure that they are providing the required care.

The authors offer 4 conjectures of when different contracts will be adopted.  When contracts will be adopted depends on 3 characteristics: variability in cost, variability in volume and easy of observing patient treatment.

  1. When variability in cost and volume is small or variability of cost is small and volume is easily observable]then block contracts will be favored.
  2. When monitoring costs are low, variability of volume is large, variability of cost is small then sophisticated block contracts will be favored.
  3. When variability in cost is large and variability of demand is large then cost-per-case payments will be favored.
  4. Characteristics of purchasers and/or providers that mitigate monitoring costs will give rise to a greater use of volume-dependent and sophisticated block contracts relative to simple block contracts. 

The results from a multinomial logit regression support these conjectures.  

Thus, although policymakers would prefer a one-size-fits all contractual arrangement, the authors show that contractual arrangements between the health purchaser and the provider must take into account the variability inherent the good being supplied.  For instance, simpler contracts should be favored when monitoring costs are high, but more complex contracts may be feasible with lower contractual cost.  Low variation in cost and volume makes block payments very attractive.  However, when there is significant variation in cost or volume, cost-per-case or volume-dependent contracts can help mitigate the providers financial risk.

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