Minding our Ps and Qs? Financial incentives for efficient hospital behaviour

In this paper, the empirical evidence addressing the particular issue of how hospitals may be reimbursed is reviewed. Most forthcoming is the indeterminate effect of prospective payment systems using diagnosis-related groups as a means of controlling costs. Such systems, by controlling only the price of hospital care, remain vulnerable to compensatory increase in patient throughput, cost-shifting and patient-shifting despite hospital cost per case being reduced. Health maintenance organisations have been shown to reduce hospital costs, but their effects on patients selection and patient outcome are unclear. Selective contracting in California (similar to the U.K. Government's proposed internal market) has also been shown to reduce costs by affecting both the price and quantity of hospital care. But these effects have occurred only in areas with high concentrations of hospitals. Global and clinical budgeting (which control price times quantity) seem to offer the most potential for cost reduction whilst maintaining patient outcome. By monitoring both cost and outcome within clinical budgets it should be possible to reduce wasteful variations in health care and so establish more efficient hospital practice.