Provider Responses to a Global Budget System: The Case of Drug Expenditures in Taiwan Hospitals

The holy grail of healthcare financing is a system that insures access to health care of appropriate intensity that is provided as e ciently as possible so as to control the growth of overall expenditure. Global budgeting systems can e↵ectively control the growth of overall expenditures by setting a cap on total reimbursements to providers. However, the e↵ect on the intensity or e ciency of care depends on the details of the system, e.g., whether the budget is a target or a fixed limit and whether all types of health expenditures are reimbursed in the same fashion. In this paper, we use Taiwans experience with a global budgeting system to study the e↵ect of such a system on healthcare decisions when reimbursements for some treatments are protected from its full impact. The global budgeting system for hospitals in Taiwan imposes regional budgets that are hard caps, that is, hospitals in each region are reimbursed from a fixed budget. However, in Taiwan the global budgeting system also includes special provisions for the reimbursement of some services, most notably expenditures for drug treatments, which we call sheltered services. Expenditures for these services are reimbursed out of the fixed budget at rates that are fixed ex ante; it is only after these reimbursements are made that the remainder of the budget is then allocated among the hospitals according to the amount of non-sheltered services provided, at the ex post reimbursement rate. Thus, hospitals must make decisions about using sheltered vs. unsheltered types of treatments to provide healthcare. In our model, hospitals can claim known amounts of the global budget by substituting drug treatments for non-drug treatments, but doing so reduces the amount of non-drug treatments provided and therefore causes the ex post reimbursement rate for these services to increase. In this paper we propose a model where each hospital must make choices about the use of sheltered vs. unsheltered treatments for the year, establish that a Nash Equilibrium in pure strategies exists if hospitals are reimbursed at a fee-for-service level and if they are reimbursed from a global budget with a hard cap that shelters reimbursements for some services, and establish conditions under which the use of sheltered services is greater under the global budget. We then estimate the size of this e↵ect for a specific sheltered service, drug treatments in hospitals in Taiwan. We find that the e↵ect of the global budget system with sheltered drug reimbursement was to increase drug expenditures by about 5 percent of the global budget. 2