Financial Risk in Health Care

Everyone seems to assume that because healthcare budgets are so big that they are immune to chance-based risk. Since most healthcare systems operate using capitated budgets, i.e. a fixed budget, you would think that the literature would be full of papers on how to calculate the risk associated with such budgets. For the UK, all you will be able to find are a few studies from the early 1990's when GP fundholding was first introduced. It turns out that financial risk in healthcare is unacceptably high to provider and purchaser alike. This explains why achieving break even is such a strenuous task with high levels of swapping between budgets. Even very large healthcare providers and commissioners can accumulate huge debt simply due to chance variation in volume and case mix. See the financial risk series of articles below.   In particular, emergency admissions are a source of exceedingly high risk and studies by HCAF have shown that the 'real world' risk is up to 3-times higher than simple chance variation. This is in addition to the financial pressures arising from the three to eight year pattern in medical emergency admissions (see 'Emergency Admissions' page). Many health care cost types are characterised by high spatio-temporal volatility. This behaviour arises from the interaction of the environment (weather, air quality and infectious outbreaks) with health. The spread of infectious outbreaks and their knock-on effects to unrelated conditions would appear to be a major contributing factor. The issue of financial risk has a huge impact on the area of GP commissioning and many of the current policies in this area need significant revision to work in the real world. Refer to the 'HRG, PbR, PBC' page for details regarding additional financial risk arising from limitations in the structure of the Health Resource Group (HRG) tariff.   The 'Emergency Admissions' folder contains details of the research relating to trends in emergency admission from both a UK and international perspective. Based on two decades of experience HCAF support the idea that the not for profit Clinical Commissioning Group (CCG) support organisation, which should ideally be jointly owned by its CCG members (similar to a co-operative), should cover around one to three million head of population for the following reasons:   1. It minimises the cost of the executive & statutory functions per head of population 2. It gives sufficient size to provide high quality decision making support functions (information analysis &     synthesis, geo-demographic tools, etc) 3. It minimises the total financial risk and allows a more rational approach to statistical fluctuation (including high     cost individuals) at local level within a higher level risk sharing envelope 4. It maximises the available funds to support effective implementation of change using managers with local     knowledge 5. It provides the necessary size for clinical networks to be effective and to disseminate good practice 6. It provides sufficient size to evaluate gross differences in counting and coding exhibited at some acute trusts     and gives the leverage to bring them to task (see 'Forecasting Demand' folder) 7. While gaining all the benefits of size it does not preclude the freedom for localities to implement the schemes     of their choice where otherwise distracting and potentially crippling financial risk issues are covered by the     larger organisation.     Discussion Documents   Variation in Healthcare       Financial Risk in Healthcare     Specify a contract       Variation in Budgets           Risk Analysis                             Why Budgets Fail      Financial Risk Series   Draft manuscripts (before editing) are provided for browsing with permission from British Journal of Healthcare Management (BJHCM). Please obtain an original copy via your library or institutional login. BJHCM articles can be obtained from www.bjhcm.co.uk or via an Athens login.   Jones R (2004) Financial risk in healthcare provision and contracts. Proc. 2004 Crystal Ball User Conference, Denver, USA  Read  Me Jones R (2008) Financial risk in practice based commissioning. BJHCM 14(5): 199-204.  Read Me Jones R (2008) Financial risk in health purchasing: Risk pools. BJHCM 14(6): 240-245.  Read Me Jones R (2008) Financial risk at the PCT/PBC Interface. BJHCM  14(7): 288-293.  Read Me Jones R (2009) The actuarial basis for financial risk in practice based commissioning and implications to managing budgets.   Primary Health Care Research & Development 10(3): 245-253.  Read Jones R (2009) Emergency admissions and financial  risk. BJHCM 15(7): 344-50  Read Jones R (2010) Cyclic factors behind NHS deficits and surpluses. BJHCM 16(1): 48-50  Read Me Jones R (2010) Do NHS cost pressures follow long-term patterns? BJHCM 16(4): 192-194.  Read Me  Jones R (2010) The nature of health care costs &  financial risk in commissioning. BJHCM 16(9): 424-430  Read Me Jones R (2010) What is the financial risk in GP commissioning? British Journal of General Practice60(578): 700-701  Read Jones R (2010) Trends in programme budget expenditure. BJHCM 16(11): 518-526.  Read Jones R (2011) Infectious outbreaks and the capitation formula. BJHCM 17(1): 36-38.   Read  Jones R (2011) Cycles in inpatient waiting time. BJHCM 17(2): 80-81  Read Me Jones R (2011) Cycles in gender-related costs for long-term conditions. BJHCM 17(3): 124-5  Read Me Jones R (2011) Death and future healthcare  expenditure. BJHCM 17(9): 436-437  Read Me Jones R (2012) Time to re-evaluate financial risk in GP commissioning. BJHCM 18(1): 39-48  Read Me Jones R (2012) Gender ratio and cycles in population health costs. BJHCM 18(3): 164-165.  Read Me Jones R (2012) Why is 'real world' health care financial risk so high? BJHCM 18(4): 216-217.   Read Me Jones R (2012) Are there cycles in outpatient costs? BJHCM 18(5): 276-277.  Read Me Jones R (2012) Volatile inpatient costs: implications to CCG financial stability. BJHCM 18(5): 251-258.  Read Me Jones R (2012) Financial risk in GP commissioning: cancer costs. BJHCM 18(6): 315-324.  Read Me Jones R (2012) Gender and financial risk in commissioning. BJHCM 18(6): 336-337.  Read Me Jones R (2012) Financial risk in GP commissioning: end of life costs. BJHCM 18(7): 374-381.  Read Me Jones R (2012) Age and financial risk in health care costs. BJHCM 18(7): 388-389.  Read Me Jones R (2012) High risk categories and risk pooling in health care. BJHCM 18(8): 430-435.  Read Me  Jones R (2012) Year-to-year volatility  in medical admissions. BJHCM 18(8): 448-449.  Read Me Jones R (2012) Financial risk in GP commissioning: the loss ratio. BJHCM 18(11): 605-606.  Read Me Jones R (2012) Volatile costs in GP commissioning: insights from Medicare. BJHCM 18(12): 656-657.  Read Me Jones R (2013) Is there a fundamental flaw in person-based funding? BJHCM 19(1): 32-38.  Read Me Jones R (2013) Population density and health care costs. BJHCM 19(1): 44-45.  Read Me Jones R (2013) Financial risk and volatile elderly diagnoses. BJHCM 19(2): 94-96.  Read Me Jones R (2013) Financial risk and volatile childhood diagnoses. BJHCM 19(3): 148-149.  Read Me Jones R (2013) Environmental volatility and health care costs. BJHCM 19(4): 198-199.  Read Me Jones R (2013) What every GP needs to know about financial risk in commissioning. General Practice Online http://www.priory.com/family_medicine/GP_commissioning_risk.htm Jones R (2014) Trends in death and end-of-life costs in the UK. BJHCM 20(6): 298-299.  Read Me Jones R (2014) Financial volatility in NHS contracts. BJHCM 20(10): 489-491.  Read Me     If you are aware of any additional relevant articles in this area please contact Rod (hcaf_rod@yahoo.co.uk) and they will be listed in the additional resources section below.    Additional Resources   Asthana S, Gibson A, Hewson P, et al. General practitioner commissioning consortia and budgetary risk: evidence from modelling of 'fair share' practice budgets for mental health. J Health Serv Res Policy 2011; 16(2): 95-101. Read   Barry C, Weiner J, Lemke K, et al. Risk adjustment in health insurance exchanges for individuals with mental illness.  Am J Psychiatry 2012; 169(7): 704-709. Read       Smith P, Mackintosh M, Ross F, et al. Financial and clinical risk in health care reform: a view from below. J Health Serv Res Policy 2012; 17 (Suppl 2): 11-17.  Read       Bardsley M. Risk sharing and risk pooling. The Nuffield Trust, London 2012.  Read   Currey N, Rumbold B, Edwards R, Arora S. Managing financial difficulties in health economies: lessons for clinical commissioning groups. The Nuffield Trust, London 2013.  Read