New OHE Publication: Model of Behaviour within Fuzzy Budget Constraints

Recently published is a new OHE research paper entitled ‘Model of Behaviour within Fuzzy Budget Constraints’. The paper presents a model to capture the behaviour of health sector decision makers (HSDMs) who make resource allocation decisions on the level and mix of healthcare production, while taking into consideration the maximum expenditure (budget) allowed by the government or the health system regulator.

A major preoccupation in health policy is the displacement of existing health care services when new technologies are mandated for reimbursement by HTA agencies. This opportunity cost is viewed as an inevitable consequence of the fixed budget constraint applied to the health service nationally and locally. However, local health care purchasers have some scope of overspend or underspend in relation to their annual budgets, and they may have some means to increase efficiency.

This paper presents a model that formally addresses all of the options that decision makers have in addition to the displacement of existing health care services when faced with a mandate to fund a new health technology.

Based on stochastic frontier analysis (SFA), two concepts are included in the discussion:

(1) minimum cost and efficiency;

(2) the effect of the limited government tolerance of reduced underspends and higher overspends relative to budget.

Based on the interaction of these concepts and the SFA, a new definition is developed: the margin of tolerance. This offers an approximation regarding the willingness of local health care purchaser decision makers to overspend their budgets.

Displacement of existing services is not the only option when HSDMs respond to a mandate to fund a new health care technology, despite the ostensibly fixed nature of their budgets. One option for a health location facing an unbudgeted increase in expenditure is to contract health service production, which implies the less-than-total satisfaction of demand. This come as an opportunity cost for the health sector: the displaced health care services.

However, this is not the only option. Evidence from qualitative studies of expenditure decisions by local HSDMs reveals a reluctance to displace services. Our model better reflects a reality where displacement is not the only response to pressure to increase expenditure on a new or expanded service.

Download the full paper here.

For more information please contact Karla Hernandez-Villafuerte at OHE.

Posted in Health Care Systems, Other Public Policy, Pricing and Reimbursement | Tagged Research Papers