Paying for the quantity and quality of hospital care: the foundations and evolution of payment policy in England

Grašič et al. Health Economics Review (2015) 5:15 DOI 10.1186/s13561-015-0050-x REVIEW Open Access Paying for the quantity and quality of hospital care: the foundations and evolution of payment policy in England Katja Grašič*, Anne R. Mason and Andrew Street Abstract Prospective payment arrangements are now the main form of hospital funding in most developed countries. An essential component of such arrangements is the classification system used to differentiate patients according to their expected resource requirements. In this article we describe the evolution and structure of Healthcare Resource Groups (HRGs) in England and the way in which costs are calculated for patients allocated to each HRG. We then describe how payments are made, how policy has evolved to incentivise improvements in quality, and how prospective payment is being applied outside hospital settings. Keywords: Diagnosis-related groups; Healthcare resource groups; Prospective payment system; Reimbursement mechanisms; Benchmarking; England Introduction The diversity and complexity of hospital care makes it challenging to devise reimbursement arrangements that ensure that the amount and quality of hospital care meets the needs of the population yet remains affordable. Most countries have adopted some form of prospective payment to encourage efficient provision of care, differentiating payments using local variants of Diagnosis Related Groups (DRGs) such as the Healthcare Resource Groups (HRGs) used in England. In this article we describe the evolution and structure of HRGs in England and the way in which costs are calculated for patients allocated to each HRG. We then explain how payments are made, how policy has evolved to incentivise improvements in quality and how prospective payment is being applied outside hospital settings. Review Development of the HRGs The origins of HRGs can be traced back to 1981, when the Department of Health commissioned research to assess the ability of North American DRGs to explain variation in the length of stay of English patients [1]. After a first refined version of the US DRG system was created in 1987, the * Correspondence: Centre for Health Economics, University of York, York YO10 5DD, UK United Kingdom’s own categorization system of HRGs was launched in 1991 [1]. While DRGs were based on major diagnostic categories (MDCs) that correspond to a single organ system, HRGs are more directly related to specialties (Table 1) and draw upon national procedure codes, developed by the Office of Population Censuses and Surveys (OPCS),a in addition to the International Classification of Diseases (ICD) codes for diagnoses. The first version of HRGs comprised 534 categories (including 12 ‘undefined’ categories: these reflect coding quality issues, for example missing primary diagnosis or age) but did not cover all acute activity, lacking groups for psychiatry, radiotherapy and oncology [2]. HRG version 2 was released in 1994, comprising 533 categories, including six undefined (‘U’) groups, but now including psychiatric HRGs. Further refinements led to the release of HRG3.1 in 1997, comprising 572 groups and including chemotherapy [3]. Another revision appeared with the release of HRG3.5 in 2003, expanding the number of groups to 610. The HRG4 design represented a major development from HRG3.5 in two key respects. First, under HRG3.5, each episode of care generated a single core HRG. Under HRG4, some high-cost elements of treatment were separated from the core-HRG, generating ‘unbundled’ HRGs. Unbundled HRGs capture eight broad types of specialised © 2015 Grašič et al. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly credited. Grašič et al. Health Economics Review (2015) 5:15 Table 1 HRG root structure Chapter Chapter Description A Nervous System B Eyes and Periorbita C Mouth Head Neck and Ears D Respiratory System E Cardiac Surgery and Primary Cardiac Conditions F Digestive System G Hepatobiliary and Pancreatic System H Musculoskeletal System J Skin, Breast and Burns K Endocrine and Metabolic System L Urinary Tract and Male Reproductive System M Female Reproductive System N Obstetrics P Diseases of Childhood and Neonates Q Vascular System R Radiology and Nuclear Medicine S Haematology, Chemotherapy, Radiotherapy and Specialist Palliative Care U Undefined Groups V Multiple Trauma, Emergency Medicine and Rehabilitation W Immunology, Infectious Diseases and other contacts with Health Services X Critical Care and High Cost Drugs Source: National Casemix Office, 2014 [35] careb that may be provided in different ways, in different settings or by different providers [4]. Second, the number of HRGs more than doubled, with coverage expanding to include non-admitted (outpatient) care, emergency medicine and some specialty areas not covered by HRG3.5, such as critical care [5]. HRG4 was first used in the 2006/07 reference cost collection exercise and replaced HRG3.5 as the basis for reimbursement in 2009/10 [6]. HRG4 was designed to evolve year on year, but in 2012/13 a more extensive update, referred to as HRG4+, provided even greater differentiation for complications and co-morbidities [7]. The additional HRG codes were mostly created by granulating existing HRGs into several splits that better reflect complications and comorbidities and are therefore more suitable for distinguishing cases with high-resource use, reflected either by higher cost or longer length of stay. HRG4+ is being introduced in three phases from 2012/13, each phase involving refinements to a subset of HRGs. Use of HRGs The application of the HRG system has evolved over time [8]. When first introduced, HRGs were used for Page 2 of 10 benchmarking, providing the basis for comparative performance assessment and commissioning. Hospitals could use an interactive national database to compare length of stay for their patients in an HRG against the national average or against a selection of hospitals. Subsequently, hospitals started to use HRGs for internal resource management, to monitor actual versus expected expenditure, and to assess the budgetary impact of anticipated changes in the volume and casemix of patients within specialties or clinical directorates. By the late 1990s, HRGs were being used for contractual purposes. At that time hospitals received their income via three main types of contractual arrangement. Block contracts specified payment for a fixed volume of activity; cost-and-volume contracts allowed for payments to be withheld (or made) if volume levels were below (or surpassed) expectations; and cost-per-case contracts involved patient-specific payments. Originally, contracts distinguished patients according to the specialty in which (...truncated)