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

The holy grail of health care financing is a system that insures access to health care of appropriate intensity that is provided as efficiently as possible so as to control the growth of overall expenditure. Global budgeting systems can effectively control the growth of overall expenditures by setting a cap on total reimbursements to providers. However, the effect on the intensity or effciency 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 Taiwan's experience with a global budgeting system to study the effect 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 game-theoretic model where each hospital must make choices about the use of sheltered vs. unsheltered treatments for the year. We establish conditions under which the equilibrium use of sheltered services is greater under the global budget. We then estimate the size of this effect for a specific sheltered service, drug treatments in hospitals in Taiwan. We find that the effect of the global budget system with sheltered drug reimbursement was to increase drug expenditures by about 5 percent of the global budget.