The advantage of a top-down cost allocation approach in developing markets

Lalit Baveja provides a primer on top-down cost allocation and discusses a Milliman project for the state government of Mandholi, India, that used the methodology.

Video transcript

Lalit Baveja : One of the important considerations in setting up reimbursement arrangements between a provider and an insurer is how the payment takes place. So typically, bundle rates are used to define a particular surgical condition, and you would cost it or you would set a rate to it. And that becomes the easiest way of managing that.

That shares the risk of utilization between the provider and the payer, so if somebody stays longer, if I do too many tests, I still get the same amount. It makes it easier for an insurer to manage that arrangement. Therefore, it becomes very important that that rate is adequate. It should cover the provider expense; it should cover their overheads or what profit margin they expect from the scheme.

So in that regard, how do you cost-set packages where people have different approaches and methods to do that? You do that by looking at every small element of care that goes into a surgery: What was the length of stay, how many days you spent there, how many doctor visits, how much nurse time? How many medications, how many tests that were done, how much time in surgery or ICU, and things like that. You can do a bottom-up buildup of all the components that went into that care. So that is one model of doing it. The other approach is called top-down, where you look at the hospital’s expenses and hospital’s activity and you average out everything. I spent so many x-thousand dollars and this is number of patients I had at cost-per-day cost, and at cost-per-surgery cost, and I use that by looking at expenses rather than the components. It is a more true reflection of hospitals’ expenses when you’re defining package rates like that.

So more and more bilateral funding agencies and governments are relying on top-down as a preferred model, because it reflects a hospital’s actual expenses rather than an imagined basket of services.

So Mandholi is one of the state governments which looked at that basic model and felt that they want to expand that model and provide the same kind of services to people above the poverty line as well—people who are middle income groups or higher. They wanted to make a more universal health insurance program. They wanted input on what should be the additional benefit coverage. What other surgeries they should cover, what other hospitalization they should cover. They wanted input which reflects what their needs are, what is the need of the state, what other conditions should be covered, and how should that be costed? So we did that in Mandholi. We looked at the disease burden of the state, we looked at the cancer registries, we looked at hospital data, and identified, “these are the other requirements of the state” which could be covered through this benefit.

It was a six-month project we completed in December. The costing part was where we used a top-down costing approach. Our the results are with the government and they launched the scheme in March this year. It’s been very successful.