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MINISTRY OF HEALTH OF MONGOLIA THIRD HEALTH SECTOR DEVELOPMENT PROJECT TECHNICAL REPORT

PAYMENT FOR PRIMARY CARE IN MONGOLIA GVG consultancy team, 22 June 2010 Gesellschaft für Versicherungswissenschaft und -gestaltung e.V. (GVG) Hansaring 43, 50670 Cologne, Germany Tel.: +49/221/91286717, Fax: +49/221/91286759 e-mail: m.wrede@gvg-koeln.de www.gvg-koeln.de

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Table of contents page Executive summary 3 1. Introduction 4 2. Existing payment systems for primary care 5 2.1. Family group practices 5 2.2. Sum hospitals 10 3. Analysis of payment-related activities in HSDP-1 and HSDP-2 15 4. Challenges to primary care payment and revenues in Mongolia 17 5. International examples of primary care payment methods 18 6. Recommendations 21 References 24 Annex A - Costing of primary care services 26 Annex B - [contract]

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EXECUTIVE SUMMARY Existing payment systems for primary care are not satisfactory. The present risk-adjusted capitation method for Family Group Practices (FGPs) is good in principle, but the fees are too low, there is a problem with unregistered patients, the FGPs are insufficiently autonomous, and there are no clear incentives for quality improvement. The present payment for sum and intersum hospitals is insufficient because service delivery is inefficient. In the actual situation, capitation cannot function well in sums, but it could if sum hospitals will be transformed in Sum Health Centres (SHCs). We recommend that risk-adjusted capitation payment will continue to be the basis for paying primary care providers (FGPs and SHCs), but at increased levels. However, this provider payment method cannot be seen in isolation of other aspects of primary care and indeed of health care reform. The capitation method is contrary to line-item budgets including fixed salaries. The capitation fee should be paid to autonomous or independent providers as a lump sum and cover all expenditures of the facility. It also requires a well-defined client denominator, preferably by voluntary enrolment of the population with FGPs of their choice (in sums there would normally be only one choice). This denominator is also needed to determine the referral rate to secondary and tertiary care, which should be monitored because an unwanted incentive of the capitation method could be increased referral. The capitation method would be difficult - although not impossible - to apply in rural areas when sum hospitals remain hospitals instead of being transformed into SHCs. In any case, the rural capitation formula requires distance from the aimag hospital as an additional adjustment factor. In December 2009, we already recommended to pay a performance bonus to well-performing FGPs and SHCs (see the report “Performance measurement and contracting in primary care”). Increased capitation payments and additional performance bonuses do not come cheap. However, these extra costs for the Mongolian health care system would be more than offset by applying efficiency measures to sum health care (see the report “The future of sum health care, December 2009) and to hospital services in Ulaan Baatar.

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1 INTRODUCTION This report describes deliverables 2 and 3 of the Third Health Sector Development Project (THSDP). The official deadline for these deliverables is 31 March 2010. Deliverable 2 is a “recommendation for the income package of Family Group Practices (FGPs) and for performance-based incentive systems for these FGPs”. Deliverable 3 is a “report on the establishment of a risk-adjusted capitation process for FGPs and Sum Health Centres (SHCs) to ensure adequate remuneration and incentives to carry out primary level health services”. Deliverables 2 and 3 correspond to activity 2 of component 1 of the terms of reference: “develop a FGP income package that can be sustained over the long term” and activity 4 of component 1: “create a FGP incentive/bonus fund”. Deliverables 2 and 3 are related to activity 3 of component 1 which is “institutionalise the budget process for FGP funding”. Sub-activities 3.2 and 3.3 will be carried out somewhat later than sub-activity 3.1 because these sub-activities depend on progress with the health financing reform under component 2. Although deliverable 2 mentions only FGPs, we have applied our proposal also to Sum Health Centres, the proposed successors to sum and intersum hospitals. Under strategic action nr. 18.3, the Implementation Framework of the Health Sector Strategic Master Plan 2006-2010 states as its objective: “Implement the legally approved provider payment mechanisms for the primary, secondary and tertiary health care providers”. It specifies that the payment method for primary care should be based on capitation. The existing payment system for Mongolian primary care is described in chapter 2. The first and second Health Sector Development Projects also developed proposals in the field of funding primary care; see chapter 3 and the list of references. These proposals were slightly more complex than the ones we propose in this report. Based on the experiences of previous projects in Mongolia and on our analysis of the present payment system, we present the challenges to a better payment system for primary care in chapter 4. Chapter 5 provides some information about payment methods for primary care in other countries. Chapter 6 contains our proposal for improving payment for primary care. In November 2009, the GVG consultancy team already developed recommendations for performance measurement in primary care and the linkage of performance to payment. Our proposals for performance-based payment have been integrated into the proposal for overall payment for primary care. After the Government of Mongolia will have decided about the future payment of primary care providers, our consultancy team can prepare and propose an implementation plan. It is obvious that improving the primary care provider payment system is closely linked to the activities under Component 2 of the THSDP (Improved health care financing and health insurance).

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2 EXISTING PAYMENT SYSTEMS FOR PRIMARY CARE IN MONGOLIA 2.1 Family Group Practices 2.1.1 Payment of FGPs Simultaneously with the establishment of a new system of family doctors a new financing mechanism has been introduced – a risk-adjusted capitation payment method. At present, this is the only method for financing FGPs in Mongolia, both in Ulaan Baatar and in aimag centres. The first capitation payment scheme was approved at the beginning of 2000. The rates were effective for 3 years. The capitation rate was adjusted for two factors: age and socioeconomic status. The following 5 age groups were determined for establishing the health care needs of the population: 1. Children age 0-1 2. Children age 1-15 3. Females of childbearing age 16-49 4. Adults age 60 and over 5. Others. The other adjustment factor was living standard, with a division in two groups: poor and non-poor. The adjusted rates established in 2000 are shown in Table 1. Table 1. Capitation fees in 2000. # Age groups Living standard Capitation payment (₮) 1 0-1 year Poor 6255

Non-poor 5432 2 1-15 years Poor 2304

Non-poor 2140 3 16-49 years, women Poor 2634

Non-poor 2634 4 Over 60 years Poor 3621

Non-poor 3292 5 Other Poor 1811

Non-poor 1646 In 2006, it was concluded that determination of poor and non-poor classes was difficult, and from 2007 the socioeconomic adjustment was made according to living place: ger district or apartment district, which can be determined easily. As apartments count those buildings that have central heating and water supply, both in Ulaan Baatar and in aimag centres. The idea is that the population of ger districts is poorer than those living in apartments, and that it is more difficult to provide health care in ger districts. The distinction is not ideal but easily applicable. In 2003, the capitation fee was increased from the original 2000 calculations. This led to a basic capitation fee for category 5 (“other”) of 3200 ₮ (poor) and 2300 ₮ (non-poor). Since the beginning of 2007, the basic capitation fee was set at 2450 ₮ in Ulaan Baatar, and at 3400 ₮ in aimag centres. In 2007 and 2008, the fees were adapted for the 4th and 5th time. These last two adaptations were again with 10 classes, with adjustment for age, sex and living place

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(apartment or ger). The last capitation payment scheme was approved by the joint order of Ministers of Health and Finance № 22/40 from 30th of January 2008, see Table 2. Table 2. Current capitation fee. Age group Living place Health demand

coefficient Per capita payment ₮

1 0-5 years Ger district 3.2 13440 Apartment district 2.8 11760

2 5-16 Ger district 1.3 5460 Apartment district 1.2 5040

3 16-49 women Ger district 1.4 5880 Apartment district 1.4 5880

4 >60 Ger district 2.0 8400 Apartment district 1.8 7560

5 Other Ger district 1.1 4620 Apartment district 1.0 4200

At the end of every year, the khoroo governors do a household survey and provide the aimag and district statistical offices with the number of the population. Capitation payment for FGPs is calculated on the basis of the number of population from the statistical office. However, FGPs do their own survey every year and the number of population from their survey is always different from the official number. In 2009, the official population of the 15th khoroo of Songinohairhan District was 7,524, but the FGP did its own survey and their number was 8,356; the difference is 832. Unfortunately for the FGPs, unregistered patients are not included in the payment method at all. 2.1.2 Other revenues The level of training of the staff makes some difference for the FGP revenues. By a Minister’s order - originally designed for government hospitals - senior degree doctors and nurses receive 15% and junior degree 10% on top of their basic salaries. In practice, this order is applied to all health care facilities, including FGPs, so the FGP staff increase their personal income as well out of the capitation revenues. In some FGPs, especially in ger districts, personal income is also increased with the duration of employment, as a kind of internal incentive. In most places there are no other financial incentives. In Sukhbaatar aimag, by the contract between FGPs and the local governor, FGPs can theoretically get incentives of 1 million tugrugs, but FGPs never satisfy the requirements. As a dis-incentive the contracts have a score system by which FGP revenues could be cut, but local governors do not apply this clause anywhere. Apart from the capitation payment, there can be only some ad hoc additional payments. In 2009, FGPs received some additional budget because of the avian flu risk. Sometimes in the end of year FGPs receive some extra money if they have debts that must be paid off. For example, in 2009 the 4 FGPs in Tov aimag had debts, and the aimag Health Department provided an extra 4 million tugrugs to pay off these debts. In Chingeltei District, 6 out of 18 FGPs had debts in 2009.

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From 2010 in Sukhbaatar aimag each FGP is going to receive an extra 500,000 tugrugs for implementation of Public Health programmes by decision of the aimag Health Department. A few FGPs charge small fees for strip tests, ECG or physical treatment. There are no informal payments in FGPs. An impression of gross revenues from 9 FGPs is presented in Table 3. Table 3. Gross revenues of some FGPs in 2009 (₮).

Attached population Total revenues Gross revenues per attached citizen Ulaan Baatar

1 8,046 40,863,200 5,079 2 10,271 54,309,100 5,288 3 15,210 77,534,800 5,098 4 6,510 33,933,000 5,212

Average 5,169 Aimags (one in each pilot aimag)

5 3,202 23,700,000 7,402 6 5,729 33,938,600 5,924 7 5,283 32,792,200 6,207 8 3,542 23,651,300 6,677 9 4,850 27,573,000 5,685

Average 6,379 Table 4. Net revenues of some FGPs in 2009 (₮).

Attached population

Total revenues

Social insurance taxes

Utilities and consumables

Net revenues per attached citizen

Ulaan Baatar 1 8,046 40,863,200 3,920,000 5,532,900 3,904 2 10,271 54,309,100 4,770,900 6,374,800 4,202 3 15,210 77,534,800 7,935,500 10,294,500 3,900 4 6,510 33,933,000 3,376,519 6,368,290 3,715

Average 5,000,730 7,142,622 3,930 Aimags (one in each pilot aimag)

5 3,202 23,700,000 1,796,631 5,624,635 5,084 6 5,729 33,938,600 3,380,676 4,866,785 4,484 7 5,283 32,792,200 2,846,300 5,467,600 4,633 8 3,542 23,651,300 2,597,700 7,191,700 3,914 9 4,850 27,573,000 2,791,800 4,792,600 4,121

Average 2,682,621 5,588,664 4,447 Most FGPs are established in separate state-owned buildings for which they do not pay rent. In Songinokhairkhan, 3 FGPs rent space in other buildings for which they pay rent. In 2009 the Ulaan Baatar Health Department provided the Chingeltei District FGPs with the following equipment:

Scale and Height measurement device Ultra sound machine

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Doppler for foetus Equipment for rehabilitation

and the Ulaan Baatar City Governor provided: Inhalation apparatus Ultra High Frequency apparatus

Parliament member D. Ochirbat gave a car (Toyota) to all Chingeltei District FGPs. In Govi-Altai aimag, a member of Parliament provided a car (Nissan) to all FGPs. In Dundgovi aimag, the Aimag Health Department provided FGPs with personal computers. Provision of equipment is ad hoc, and mostly depends on international donor organisations and projects. The revenues for consumables, rent and maintenance of the premises are insufficient (see Table 4). 2.1.3 Contracting Officially, governors contract private FGPs to provide primary care services to a circumscribed population. The contract is with the head of the FGP, and the FGP revenues must be specified in this contract, based on capitation. Every FGP has its own internal labour rule on how to remunerate the staff. However, in reality, most FGPs - especially in aimags - follow civil servants salaries which are determined by Government Resolution. If FGPs have fewer doctors and nurses than prescribed in the standards, they can receive higher personal incomes. The private status of the FGPs has little meaning in Mongolia. The average salary of a FGP head is 404.450 ₮ per month, this is 43.6% higher than the salary of an FGP doctor who is not the head. Department heads at secondary and tertiary level also receive an addition for responsibility. This addition is different everywhere but it is about 30% of the basic salary which is shown in table 5. In all Mongolian FGPs together, 83% of total budget is allocated to staff salaries. By the Labour Law, employees can receive additional money for transportation to the work place and for lunch, and the amount of this money should be stated in the contract between the employee and the employers. All state hospital staff receive this grant, but FGP and sum hospital staff usually does not. Table 5. Salaries of doctors and nurses (₮) Family doctors

Secondary level doctors

Tertiary level doctors

Family nurses Secondary and tertiary level nurses

281,560 237,762 249,650 230,000 187,954 Articles on payment in the contracts between governors and FGPs are different in different aimags and districts: Arkhangai aimag 4. Aimag governor`s responsibilities: 4.3. To confirm the required FGPs budget by the Local Parliament. 4.4. To execute payment within first 10 days of each month. 4.5. To monitor and evaluate financial efficiency 4.7. To integrate FGPs budget into a combined health sector budget.

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Dundgovi and Tov aimags Contract responsibility: 1. If the FGP manager could not implement some contract tasks he/she should accept responsibility regarding related laws and regulations. 2. If the FGP manager implements the contract well, he/she should accept incentives regarding related laws and regulations. Govi-Altai aimag 1. General conditions 1.1. Aim of this contract is to finance the FGP which provides its attached population with primary care on the basis of capitation payment. 1.2. Cost of primary care to the attached population is based on the number of the bag population. 2. Governor`s responsibilities 2.2. To invest in the building and equipment of the family clinic. 3. Aimag Health Department`s responsibilities 3.3. To unite FGPs budget into combined budget. 3.6 To evaluate the contract every quarter and execute the payment within the first half of first month of the next quarter 6. Contract evaluation Percentage of contract fulfilment Percentage of the budget regarding contract fulfilment Under 65% 50% 65-75% 70% 75-85% 95% 86-90% 100%

Sukhbaatar aimag The Aimag Governor`s Office will measure the performance of the FGPs at the end of the year and if the performance measurement is above 85% the Governor`s office gives an incentive of 1 million tugrugs. Ulaan Baatar 2. District Governor`s responsibilities 2.5. Within the first 10 days of each month, the District Governor will finance the practice on the basis of the financial report of the previous month. 5. Contract evaluation * The contract should be evaluated every quarter. * If the practice completely fulfils the contract it can receive incentives. * If the score is below 123.4 for an apartment district and 114 for a ger district for the last 2 quarters the practice budget will be decreased by 10%. * If the score is below 123.4 for an apartment district and 114 for a ger district for the last 3 quarters the practice budget will be decreased by 15%. * If the score is above 162.5 for an apartment district and 152 for a ger district for the last 4 quarters the practice will get incentives. * If the score is below 123.4 for an apartment district and 114 for a ger district for a whole year the contract can be cancelled.

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2.1.4 FGP expenditures Officially, FGPs are private entities thus they should pay company income tax. But most of them do not pay this kind of tax, because in the reality most FGPs do not have any money left at the end of the year. Some FGPs pay around 500,000 tugrugs per year as income tax if some amount of money is left in the account at the end of the year. All FGPs pay employers social insurance contribution (about 7% of total budget). The following items are paid annually by the FGPs (10% of the total budget, approximate figures): * Stationary: ₮ 1.2 million * Electricity: ₮ 1 million * Heating: ₮ 1.8 million * Fuel and transportation expense: ₮ 2.1 million * Postage and telecommunication: ₮ 0.4 million * Water supply: ₮ 0.2 million * Travel expenses and per diem for business travel: ₮ 70,000 (only for aimag FGPs) * Clothing and bedding: ₮ 0.2 million (not every year and not every FGP) * Drugs: ₮ 0.4. 2.2 Sum hospitals Officially, sum and intersum hospitals should be mostly paid by the capitation payment method since 2007. The current methodology of sum and intersum hospital payment was approved by the joint order of Ministers of Health and Finance № 21/41 from 30th of January 2008. It is similar for all aimags in Mongolia. By this order the total payment is divided into 4 components: 1. Reimbursement of fixed costs. This reimbursement does not depend on the number of attached population, and provides for the cost of electricity, heating, gasoline and water. This is determined by the execution of the previous year. 2. Capitation payment. Age groups of the population Financial ratio Children 0-5 years old 2.81 Children 5-16 years old 1.21 Women 16-59 years old 1.75 Men 16-59 years old 1.00 People over 60 3.92

Reimbursement of fixed costs should be deducted from the total budget and the remaining amount multiplied by 0.75. 3. Payment for distance and remoteness. Reimbursement of fixed costs should be deducted from the total budget and the remaining amount multiplied by 0.20. 4. Payment for performance. Reimbursement of fixed costs should be deducted from the total budget and the remaining amount multiplied by 0.05. After approval of the Order of the Ministers of Health and Finance № 16/19 in January 2007, all aimags implemented this new payment method but faced some problems (source: Ministry

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of Health, Finance and Economic Department, 2009). If the population of a sum is below 3,000 the budget is insufficient. Aimag health departments use 10% for distance and 5% for performance to compensate for this insufficiency. In reality more than 70% of the total budget is the salary of the staff; a distribution of the remaining 30% is presented below. Since all sums have a hospital with 8-10 beds the staff number is almost the same regardless of the number of attached population. Intersum hospitals receive additional budget if they provide secondary level care. But most of intersum hospitals do not provide higher level care except appendectomy, so an average intersum hospital receives only approximately 1.5 million ₮ additional funds from the Health Insurance Fund (HIF) per year. Some intersum hospitals like Govi-Ugtaal in Dundgovi aimag or Erdenemandal in Arkhangai aimag receive nothing from the HIF. The overall sum or intersum hospital budget is a line-item budget. The health economist or accountant of the Aimag Health Department calculates the various items mostly based on the execution of the previous year. The level of training of the staff makes a difference for the sum hospital revenues. Just like FGPs and general hospitals, senior degree doctors and nurses receive 15% and junior degree 10% additional salary. There are almost no incentives or dis-incentives for sum hospitals. By the joint order of Ministers of Health and Finance № 21/41 from 30th of January 2008, the Aimag Health Department can withhold 5% of the total budget for the sums and can use this fund as incentives. In most cases sum hospitals have debts for fuel and transportation expenses. There is a budget for the implementation of public health programmes from the Aimag Health Departments but this budget is usually spent for paying off debts. There are hardly any other sources of revenues except the above-mentioned payments. Like FGPs, sum hospitals receive salaries for doctors under supervision in addition to the payment. Sometimes sum hospitals receive a certain percentage of left (saved) money from the previous year. Very few hospitals have a little income from non-core activities like livestock or small vegetable area. Very few sum hospitals receive some informal payments but this is negligible, around 150,000 tugrugs per year. The gross revenues of 5 sum hospitals (one in each pilot aimag) are presented in Table 6. We see major differences in revenues per citizen. Table 6. Gross income of 5 sum hospitals in 5 pilot aimags (₮).

Attached population

Total revenues

Gross revenues per attached citizen

1 4,440 133,652,279 30,101 2 2,443 86,682,538 35,482 3 1,266 84,095,400 66,426 4 1,938 90,134,300 46,509 5 3,197 127,704,500 40,827

Average 43,869 We see the same differences in per capita total revenues in the 8 sum hospitals that have been selected by Order of the Minister of Health nr. 59 of 19 February 2010 for piloting a

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transformation into Sum Health Centres, see Table 7. Table 7. Funding of pilot sum hospitals in 2009 and 2010 (₮).

nr: sum:

total expenditures 2009 (million)

budget 2010 (million)

per capita expenditures 2009

per capita budget 2010

Bulgan 101.9 105.7 43,106 44,769 Tuvsh-ruuleh 121.8 123.1 35,718 36,100 Taishir 121.3 123.9 77,906 79,576 Delger-tsogt 86.7 86.6 45,488 45,435 Luus 85.6 90.0 41,075 43,186 Asgat 98.1 104.5 55,268 58,873 Sergelen 92.6 89.1 48.917 47,068 Altan-bulag 92.1 98.4 30,256 32,326 Apart from payments to staff (70-75%), sum hospitals had the following expenditures:

Employers’ insurance contribution 7 - 8% from total revenues Cleaning, laundry 0.2 – 0.4% Electricity 0.4 – 0.8% Heating 2 - 3% Fuel & transportation costs 4 - 5% Postal and telecommunication 0.1% Water supply and treatment 0.1% Domestic business trip 0.2 – 0.3% Inventories and materials 0.3% Clothing and bedding 0.3% Food expenses 3 - 4% Medicines & vaccines 5 - 10% Current renovation 0.1 – 0.3%

The income of 5 sum hospitals in the 5 pilot aimags after deduction of taxes and the other above-mentioned expenditures is shown in Table 8. Table 8. Revenues and expenditures of 5 selected sum hospitals (₮).

Attached population

Total revenues Social insurance taxes

Other expenditures except salaries

Salaries

1 4,440 133,652,279 10,438,379 28,319,551 94,894,349 2 2,443 86,682,538 6,492,655 31,891,737 48,298,146 3 1,266 84,095,400 5,982,500 26,820,900 51,292,000 4 1,938 90,134,300 6,611,600 24,501,400 59,021,300 5 3,197 127,704,500 8,409,947 35,887,100 83,407,453 By the joint order of Ministers of Health and Finance № 21/41 from 30th of January 2008 there can be a transfer of payment between sums and even aimags for the treatment of patients that are registered elsewhere. However, only a few aimags use this option. As civil servants the minimum salaries of the staff members are determined by Government Resolution № 351 from 26th of December 2007, and for sum and intersum hospitals there is an additional 20%. Directors of sum and intersum hospitals receive an additional 40%.

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A comparison of salaries of sum/intersum hospital staff and FGP staff is presented in Table 9. Table 9. Comparison of salaries of sum/intersum hospital and FGP staff (₮). Sum/intersum hospital doctors

FGP doctors Sum/intersum hospital nurses

FGP nurses

320,400 281,560 239,400 230,000 The salary of a sum/intersum hospital doctor is 12% higher than the salary of an FGP doctor. By a Government Resolution primary care doctors and nurses should receive additional 20% of salary but due to insufficient budget FGPs usually do not receive it. The average salary of a sum/intersum hospital director is 465,565 ₮; this is 45% more than a doctor’s salary. There is no budget line for buying and maintaining equipment. Sum hospitals do not buy premises and equipment; these are usually provided from the state or local budget. For example, in 2009 the Dundgovi Aimag Health Department provided some sum hospitals with the following equipment: * Vaccine career * Vaccine cooler box * Thermometers * Automatic pipette * Haemometer Sahli * Portable autoclave * Laboratory scale * Drying cabinet * Binocular microscope * Centrifuge * Automax There is a budget for drugs and sum/intersum hospitals can spend money from this line, but the budget for drugs is always insufficient. Sum and intersum hospitals pay for consumables, cleaning and all other utilities. In the contract between the Aimag Health Department and the sum hospitals there is a separate paragraph about payment. This paragraph is as follows: Payment from state budget and payment conditions 1. The annual budget of the sum hospital is the preliminary yearly cost of the products which should be produced. 2. Payment should be made by the plan in the attachment of this contract through the Aimag Treasury Fund. 3. Payment of the sum hospital should be executed from the Aimag Treasury Fund. 4. The Aimag Treasury Fund has the responsibility to send payment to the sum hospital from the account of the aimag governor every month. 5. The sum hospital director has the responsibility to provide the Aimag Health Department and the Aimag Treasury Fund with a monthly financial report and a quarterly production report. 6. The Aimag Health Department director has the authority not to execute payment if the sum hospital has not produced certain products. If the products of the sum hospital are not satisfactory in quantity and/or quality by the analysis of the reports, payment can be reduced

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or even stopped next month, quarter or year. In reality, this never happens.

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3 ANALYSIS OF PAYMENT-RELATED ACTIVITIES IN HSDP-1 AND HSDP-2 The first payment method for FGPs was developed by international and national consultants under HSDP-1 as risk-adjusted capitation payment. Capitation rates were adjusted for age, sex and living standard (10 risk-adjusted classes). Payment was executed quarterly from local budgets. The new financing method had the following specific characteristics: * There were no cost items listed (that means: it was not a line-item budget); * Income of the FGPs increased with the number of patients registered, especially with the number of poor patients; * The FGP had the ability to make its own arrangements for payment in order to provide more and better primary health care services; * The FGP, by improving the quality of services and by positively changing its attitudes towards the needs of the patient population, could increase the number of families registered with the FGP and thus, enhance its income; * Family doctors could benefit financially through competition with other FGPs. FGPs are free to attract and register as many families as they can based on the quality of their services, including drawing families away from competing FGPs. A joint Ministerial Order No. 29/01 (Ministry of Finance and Ministry of Health and Social Welfare) made the capitation payment rates effective in 2000. There were two additional aspects: first, money which was left in the account of FGPs at the end of each quarter did not flow back to the local budget, and second, payment was linked to performance. HSDP-1 developed 13 performance indicators and the project recommended to evaluate performance every quarter. If performance would be evaluated as good (comparing with national data) FGPs could earn up to 5% of capitation payment every quarter. For example, if performance rate was 81-100% FGPs received up to 92% of payment, if performance rate was 61-80% FGPs received up to 72% of payment. It is apparent that even if an FGP executed its contracted obligations 100%, it was not able to receive 100% financing and in fact lost 8% of it’s financing. Based upon the above, one third of the FGPs did not receive their whole financing due to their inappropriate performance contract. The unsatisfactory fulfilment of contracted services may be due to a lack of experience in performance contract evaluation. FGPs in many cases were not accustomed to carrying out contract obligations conscientiously, and health administration officials may have evaluated contract fulfilment too rigidly, leading to potentially unnecessary or unrealistic requirements. These factors could increase the rate of unsatisfactory contract performance and resulted in lower funding levels. Approximately 75% of the FGPs were not able to carry out their contracted obligations (with performance contract rate less than 90%). Later, HSDP-1 changed payment from the initial 10 risk adjusted classes, aggregated into a single lump sum payment based on clients registered. Payment under Minister’s Order No. 174, payment was from 2 sources – the Local Budget Fund (LBF) and the Health Insurance Fund (HIF), with differential payment for poor and non-poor. The proportion of ‘poor’ people is based on percentages adjusted for Ulaan Baatar and aimags and ger and apartment areas. 40% of funding was paid by LBF and 60% of funding from HIF.

HSDP-2 concluded that punishing FGPs by reducing funding is not the most appropriate way to enforce the performance contract. Penalizing family doctors by withholding funding is ultimately detrimental to the FGP model. Reduced funding for family doctors made it harder

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for them to perform better in future and more difficult to catch up to actually achieve the benchmarks set in the contract. The project recommended that a better way to apply the contract in Mongolia would be through an incentive system to encourage FGPs. National and international consultants recommended an incentive system on an annual basis. By the recommendations 5% of the total payment should be held back and put into a bonus pool. FGPs that reached the benchmarks should share the bonus. FGPs that did not reach the target should receive the basic funding. What could be deduced from this? First, no FGPs would get an actual reduction in their basic budget. Second, under a bonus arrangement, there is an incentive to reach the targets and receive additional funding. Third, each year more FGPs achieved the targets. This increase demonstrated the positive effects of the bonus system: overall, FGPs were showing improvements and getting rewarded. The second Health Sector Development Project revised and developed the FGP capitation model and estimated capitation payments for all FGPs in Mongolia based on the above-mentioned age/sex categories and place of residence. Since 2004, HSDP-2 piloted capitation payment for sum and intersum hospitals, first in 5 aimags and since 2007 in the whole country.

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4 CHALLENGES TO PRIMARY CARE PAYMENT AND REVENUES IN MONGOLIA Years ago, Mongolia has opted for capitation as the basis for paying FGPs, and later - in a more limited form - sum and intersum hospitals as well. This is fortunate, as it is the recommended payment method for primary care, relatively easy to administer for purchasers and providers alike, and safe to budget for purchasers (see chapter 5). It is also fortunate that risk-adjustment has been kept simple: for age/sex groups and for socioeconomic status only. Mongolian purchasers and providers now have some experience with this system. However, in its application it appears not to function well, due to several problems that have arisen. The first and main problem is that the capitation fees are too low: they barely cover a low personal income for the doctors and nurses, leaving little or no room for investments, maintenance and consumables. The low personal income contributes to making primary care an unattractive career path for doctors. Primary care receives too low a share of government funding for health. The second problem is that the model of private FGPs contracted by public purchasers does not function, and that in reality FGP staff are treated as civil servants receiving government salaries, and with government meddling in their internal affairs. The private status of FGPs is not really respected, also by old-fashioned thinking of government representatives. FGPs are private, but they end up with lower salaries than public sum hospitals. The whole idea of line-item budgets is contradictory to capitation in primary care, private or public. A third problem is that no proper incentive system is in place for quality improvement. At present, there is more emphasis on punishment than on rewards, although in reality neither play a major role because of the general lack of funding for FGPs. In December 2009, we have made a proposal for some payment to be based on performance indicators, and we come back to it in chapter 6. The fourth problem is that capitation does not work in sum and intersum hospitals that are considered and functioning as ineffective and inefficient hospitals rather than as primary care institutions. In December 2009, we have proposed to transform sum hospitals into sum health centres, and to treat them in the same way as FGPs, albeit with an additional characteristic of geographical isolation which should translate in additional revenues and equipment. A fifth problem is that capitation can only function well with a clearly described patient population, either by voluntary enrolment of clients or by attaching the real number of citizens to a primary care facility, including the so-called unregistered population. Registration of enrolment or attachment is of course more difficult - but not impossible - when parts of the population are migrating within the country. One of the conditions for any payment method reform is obviously the capacity within the MOH and aimag/city Health Departments to manage and administer the new payment method.

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5 INTERNATIONAL EXAMPLES OF PRIMARY CARE PAYMENT METHODS Fee-for-service, capitation and salary are the three basic payment systems for primary care providers. Capitation is a type of health care financing where a provider is paid a fixed per-capita fee for a pre-negotiated market basket of services on behalf of an enrolled group of consumers. In other words: capitation is a fixed amount of money per patient per unit of time paid in advance to the physician for the delivery of health care services. Potential advantages of capitation are: * Strong incentives for efficiency, important for purchaser and provider; * Fosters primary care and prevention, important for clients and (to some extent) purchaser; * Fosters “population orientation”, important for clients. Potential disadvantages of capitation are: * The risk of increased demand is shifted from the purchaser to the provider, therefore capitation could offer incentives to skimp and to refer, which is disadvantageous for purchaser and clients; * Incentives to avoid sick consumers, disadvantageous for the purchaser; * Individual patient and provider choices may be limited, which may be seen as a disadvantage for clients. Capitation has the following characteristics: * The capitation rate should explicitly acknowledge and include the family physician's case management function (coordination of care, drug management, etc.). * The capitation rate should also cover the cost of any additional practice expenses (e.g. non-physician staff, equipment, quality standards, continuing professional development, data collection) that are needed to meet the contractual requirements. * Purchasers that capitate their physicians should provide incentives to physicians to encourage care in the most appropriate setting. Capitation implies fixed lists of patients and thus limited choice of providers for the patient; a choice that is restricted further by the fact that primary care physicians under capitation payment are also usually gatekeepers to specialised care. As a consequence, primary care physicians have a strong position as providers of primary health care by evaluating patients’ needs or urgency for access to secondary or tertiary care. Access may be hindered by risk selection strategies due to non risk-adjusted capitation payments. Furthermore, under capitation payment physicians may feel encouraged to provide preventive services, since they may reduce future costs, although a comprehensive preventive approach also increases life expectancy and old-age health problems. And because primary care physicians under capitation payment have fixed patient lists, they are theoretically in an excellent position to provide services that are targeted towards the family and the population. Capitation payment systems provide a higher degree of coordinated care for the patient. Since they have to enrol with a specific primary care physician and this physician usually coordinates other levels of care, information on the patient needs is much less fragmented than in fee-for-service systems. Of course, owing to fixed patient lists and the gatekeeping function of the primary care physician, free choice of providers is restricted. However, usually patients are free to enrol with another primary care physician after a specified period of time. While this mechanism increases choice options for the patients, it opens up opportunities for

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risk selection by primary care physicians in a competing environment. Although this behaviour is quite uncommon in Europe, there could be incentives for primary care physicians to force unfavourable risks to look for other physicians. Such behaviour would undermine the advantages of capitation systems with regard to continuous and coordinated primary care for the group of patients needing it the most. Risk selection can be countered with a regulation of mandatory acceptance if the total number of enrolled clients has not yet reached the upper limit. International recognition of prospective capitation has grown in the past 15 to 20 years. Currently, it is used by health care systems that range from market-driven systems, such as the U.S. system, to government-dominated systems, such as the system in the United Kingdom. Under provider payment reforms in these trendsetting health systems, prospective capitation has produced important systemic effects, including increased emphasis on prevention and continuity of care, decline in admission rates, and decline in length of hospital stay. Because both positive and negative experiences have been widely documented, prospective capitation has become an accessible option for trial application in the Latin American and Caribbean countries. In the context of prospective capitation, to what extent capitation rate should be adjusted for variation of health risks within the regional and provider-specific populations becomes an important question. Keeping capitation rates uniform would unduly burden providers who need more resources because they deal with relatively unhealthy populations. On the other hand, if too many risk groups are distinguished, risk-adjustment becomes a complex affair, requiring vast amounts of information for maintaining and updating a highly differentiated capitation rate schedule. A commonly recommended approach to risk-adjustment suggests that the capitation rate should be differentiated on the basis of a limited number of variables. They should be selected for their ability to explain health risks, reliability, administrative simplicity, and invulnerability to manipulation on the part of providers. Furthermore, differentiation should not encourage counterproductive changes in provider behaviour. A review of numerous studies in risk-adjustment distinguishes the following three groupings of variables, rated by importance: 1) Socio-demographic factors, such as age, gender, place of residence, income, educational status, family size, and employment status, account for about 20% of the variation in health expenditures among individuals. 2) Past health expenditures as a proxy for prior utilisation explain about 60% of the non-random variation in costs. 3) Chronic sickness status explains an additional 15% of the variation. It is important to recognize that these variables are inextricably linked in complex and multidirectional ways. In England, general practices are paid a capitation rate adjusted for the number of elderly patients, children eligible for child health surveillance services, and patients living in deprived areas. Payment is emerging as a policy tool that can be used in addressing quality concerns. The World Health Organization calls for incentives that are sensitive to performance. The Institute of Medicine in USA recommends that purchasers examine their current payment methods to remove barriers that impede quality improvement and incorporate stronger incentives for quality enhancement. Every capitated system now includes some kind of additional payment for health promotion and illness prevention, thus supporting a widely held view that the capitation payment itself is insufficient. For example, financial incentives were introduced in 1990 for capitated general

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practitioners in the United Kingdom to increase their health promotion activity in primary care. Many countries in the world add an element of fee-for-service to their capitation payments in order to promote certain activities that could be considered as additional to standard family medicine. Examples are immunisation of children, health promotion activities, minor surgery and care for chronic patients such as diabetics. The advantage would be that such services are better carried out than otherwise, and that such services are provided at primary level instead of secondary level or by separate organisations. The major disadvantages are that there may be a tendency to focus on the paid services rather than on the capitation-funded services, that providers will increase the number of paid services leading to unexpected cost overruns, and that it creates additional administrative work. Fee-for-service payment requires careful monitoring by the purchaser to watch for an increase in activities and variation between practices. Another possibility (practiced, for example, in Bulgaria) is to increase the capitation fee for certain patients with chronic diseases, i.e. another form of risk adjustment apart from age/sex and socioeconomic status. With motivated staff and sufficiently high salaries, the salary method could be an option for paying primary care staff. However, international experience (and experience in socialist countries before the transition period) showed that salaried staff tend to be unreceptive to the clients and unmotivated to increase their performance. This often leads to a lower volume of provided services and a higher referral rate. A fixed salary has no link to the quality and quantity of services provided, but makes it of course safer for the purchaser to budget for primary care. A detailed overview of payment methods for primary care - also in transition countries - can be found in Langenbrunner et al. 2009.

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6 RECOMMENDATIONS Risk-adjusted capitation is the fairest and simplest method of paying primary care providers. The method is also a guarantee against unexpected cost overruns for purchasers. It is widely understood in Mongolia and we recommend to keep this method as the basis for paying both FGPs and SHCs. Even if SHCs remain sum hospitals with a large inpatient function (which we do not recommend), a capitation formula can be established that covers both primary care and inpatient services, but this is more complicated. When a sum hospital - especially one with a small attached population and relatively high fixed cost - will be transformed into a SHC, the facility will need a transition period to adjust to the new payment method. Risk adjustment can remain as it is, i.e. with a differential for 5 age/sex groups and two socioeconomic groups. We do not yet recommend to use additional postgraduate qualifications (“career pathways”) as a method to increase the capitation fee because such a career does not yet exist in family medicine in Mongolia, but it could be considered at a later stage. At present, the level of the capitation fees for the above-mentioned 10 categories is too low for the proper functioning of FGPs and should be increased by approximately 30%. This percentage has been proposed by the Ministry of Health and seems sufficient in the short term to provide some breathing space. However, it is not based on calculation of real unmet costs. Such calculation cannot be made when many “attached” patients never consult the FGP for various reasons, many patients self-refer to higher levels because gatekeeping is not in place, and the private status of the FGPs has not been settled (see Annex A). The future single purchaser (see our discussion paper “Health financing reform in Mongolia: pooling of funds and single purchaser” of 18 December 2009) can consider a further increase in the future if reliable information on the various cost factors of providing good family medicine becomes available, and for correction of inflation. The single purchaser can also adapt the precise ratios between the 10 categories in the future if new information on the use of primary care services by these population groups becomes available. The capitation payment should ideally cover all expenditures by the primary care provider: staff remuneration, medical consumables (to be specified by the purchaser), rent, utilities and investment. It should of course be clearly described in the contracts with the single purchaser what services are to be provided by the primary care providers, including urgent medical care and simple laboratory services. The payment should be provided as a lump sum without line-item prescription to be spent by the facility according to need. Such an approach would be easier if the primary care facility has an independent (private) status, but is also possible when a degree of autonomy is accorded to a public facility. Spending by primary care facilities should of course be monitored by the purchaser, at least in the beginning. Autonomy or independence should not be allowed to lead to sloppy services. Potential perverse incentives of the capitation method are tendencies to underserve the attached population and to refer too many patients to secondary care. Utilisation rates and referral rates should therefore be monitored, but utilisation and referral data become reliable and useful only when the primary care facility has a proper list of enrolled clients and when a proper gatekeeping has been arranged. A system of compulsory enrolment with an FGP of the client’s choice (which we recommend) creates competition and can eliminate the risk of underserving the clients. Upgrading the competencies of the primary care providers, monitoring by purchasers and financial disincentives for patients can reduce the referral rate. Training of primary care personnel, enrolment, gatekeeping and referral will be discussed in other THSDP reports.

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Capitation payment is fair only if the denominator is clear. Ideally, the denominator is the number of population voluntarily enrolled with the primary care facility. If this approach is not adopted in Mongolia, the contract between purchaser and facility should specify which population will be considered as attached to the facility: the number used by the administrative authorities (district, aimag, sum) or the number counted by the facility. It is not fair to promise free primary care services to the whole population but paying the facility only for the population officially registered in that sum or khoroo. This is especially important in Ulaan Baatar with its large unregistered population. Non-registration of the migrant population is not only a health system problem but relevant for several ministries and authorities. If the reformed health insurance system will reach nearly 100% of the population, the denominator problem will automatically be resolved, regardless the place of residence of the citizens. Apart from adjustment for age/sex and socioeconomic status, rural primary care facilities in aimags - mostly SHCs (presently sum and intersum hospitals) but possibly also some FGPs in outlying districts of Ulaan Baatar - require adjustment for an additional factor: geographical isolation. Distance creates extra responsibilities, cost and inconveniences in primary care: 7 x 24 hours duty, keeping observation beds, requirement of additional medical skills, cost for ambulance transportation, and more difficult living conditions (housing, schools, shops, etc.). Therefore, we recommend to increase the national capitation fees by 50% for all rural primary care facilities that are situated at more than 50 km from the nearest hospital, and an additional 25% for every additional 50 km. Percentage and distances are of course open for discussion. When the sum facilities will remain rural hospitals that are staffed according to present standards, the capitation method can still work, but then other (much higher) fees have to be calculated. Apart from the capitation payment, we recommend to add the possibility of an additional bonus when a primary care facility performs well. This has been described in the GVG technical report “Performance measurement and contracting in primary care” (18 December 2009). One should also consider increasing the capitation fee for FGPs and SHCs with doctors and nurses who are certified as family physicians and family nurses. For the time being, we do not recommend to add fee-for-service payment for specific services (for example chronic diseases or health promotion) to the capitation fees plus performance bonuses in Mongolia, for several reasons: * it creates an additional administrative burden; * it is difficult to monitor properly; * upgrading of primary care staff should take place first; * some public health tasks are already included in our recommendations for performance-based bonuses. Increasing the level of capitation fees, adding adjustment for distance from a general hospital, paying capitation also for unregistered clients, and paying performance bonuses do not come cheap. However, these additional costs would be more than offset by applying efficiency measures to sum health care and hospital services in Ulaan Baatar. Efficiency measures for sum health care have been proposed in the GVG technical report “The future of sum health care” of 18 December 2009. Efficiency measures for the hospital sector in Ulaan Baatar are the main subject of the planned fourth Health Sector Development Project. If efficiency measures can not be realised politically, there may still be some scope for finding additional

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funds for primary care in Mongolia by increasing the overall government budget for health, but that will probably not be sufficient for reversing the present slow deterioration in primary care. Our team produced a draft contract between the purchaser of primary care services and the primary care provider, see Annex B. This contract of course takes into account the duties of the provider and the evaluation by the purchaser. Once decisions have been taken on the capitation and performance payment of primary care providers, the draft contract can be amended. Changes in the primary care provider payment system that are relevant for the public must be part of the planned information campaign that is described in our technical report “Referral and gatekeeping”.

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References ADB. Health and Social Protection - Rapid Sector Assessment. October 2008. Anonymous. Operational Survey Report on the Financing of Family Group Practices. HSDP-1, April 2002 Anonymous. Funding arrangements for FGPs, HSDP-1, April 2004 Anonymous. Evaluation criteria for the FGP contract. HSDP-1, June 2004 Anonymous. Incentives for FGPs. HSDP-1, 2005 Bolormaa T et al. Mongolia: Health system review. Health Systems in Transition, 2007; 9(4):1-151. Glazier RH et al. Capitation and enhanced fee-for-service models for primary care reform: a population-based evaluation. Canadian Medical Association Journal 2009;180(11):E72-E81 Gosden T et al. Impact of payment method on behaviour of primary care physicians: a systematic review. J Health Serv Res Policy 2001;6(1):44-55 GVG Consultancy Team. Technical report: Performance measurement and contracting in primary care. Ulaan Baatar, 18 December 2009 (+ list of references) Hindle D, Khulan B. Capitation payments for soum health centres. Second Health Sector Development Project, MOH/ADB, 2004 Hindle D, Khulan B. New payment model for rural health services in Mongolia. Rural and Remote Health, 2006;6:434 (online). Langenbrunner JC, Cashin C, O’Dougherty S (eds.). Designing and implementing health care provider payment systems (How-to manuals). Washington DC: World Bank/USAID, 2009 Ministry of Health, Finance and Economics Department. Assessment of the initial effects of nationwide capitation funding of sum medical clinics and family group practices. Ulaan Baatar, 2009 NDPHS Expert Group on Primary Health Care. Primary health care in the Northern Dimension countries. Stockholm: NDPHS, 2008 Rosen AK, Reid R, Broemeling A-M, Rakovski CC. Applying a risk-adjustment framework to primary care: can we improve on existing measures? Annals of Family Medicine 2003:1:44-51 O’Rourke M, Mira M, Orgil B, Jeugmans J. Developing family medicine in Mongolia. Asia Pacific Family Medicine 2003;2:65-70. Saltman RB, Rico A, Boerma GW (eds). Primary care in the driver’s seat? Maidenhead: Open University Press, 2006

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Starfield B. Toward international primary care reform. Canadian Medical Association Journal 2009;180(11):1091-2 Telyukov A. Guide to prospective capitation with illustrations from Latin America, 2001. Bull World Health Organisation vol. 84 nr. 11 World Bank. Review of experience of family medicine in Europe and Central Asia. Report No. 32354-ECA.Volume 1: executive summary. Washington DC, May 2005 World Bank. The Mongolian health system at a crossroads; an incomplete transition to a post-Semashko model. Washington DC, January 2007.

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ANNEX A - COSTING OF PRIMARY CARE SERVICES In an optimal situation of contract negotiations between responsible purchasers and providers, both parties should know what is being purchased and its value. Between 2000 and 2008, the basic capitation fee for FGP services has been increased several times without apparent cost analysis except that the personal incomes of doctors and nurses were considered to be too low. The ratios between the basic capitation fee (male adult in apartment district) and the other 9 categories are also not based on recent cost calculations. In our recommendations we ask for the basic capitation fee to be increased by 30%, but it is explained that this is not on the basis of a cost calculation and why this is not the case. Members of the MOH Working Group have asked for any increase to be based on the calculation of real costs. It would, of course, be possible to select a sample of, say, 10% of FGPs in Ulaan Baatar and the aimags, analyse their expenditures in 2009, and make an judgment on where the capitation payment has been insufficient to meet “normal” expenditures. These expenditures are: * personal net income for doctors and nurses: this is an arbitrary figure in a private facility, but possibly one could agree on an acceptable level; * official taxes: this is a given; * maintenance of the premises and equipment: who is responsible? probably local government, but what if it does not happen? * depreciation of premises and equipment: seems to be ignored; * utilities such as heating, electricity, water: depends on the size and construction of the building, and opening hours; an acceptable average could possibly be found; * drugs, injections, bandages, laboratory and other consumables: depends very much on how the doctors and nurses diagnose and treat the patients; there would be an incentive to limit such expenditures, and rather refer to secondary care; * fuel for transportation: difficult to agree on an acceptable level; * payment for continuing medical education: who is responsible? * other expenditures such as office items and laundry. Such a survey would of course take time and cost a lot of money. From this list it is immediately clear that it is very difficult to agree on the “real” cost of FGP services per, say, 1,000 inhabitants unless the purchaser and the provider can agree on certain guidelines. This is made even more difficult by the facts that diagnostic and treatment practices vary between FGPs, that there is no functioning gatekeeping and referral system, that there is disagreement about the population denominator, and that FGPs are private in name only. Training of staff in primary care guidelines (with control by the purchaser), a voluntary enrolment system, the establishment of a gatekeeping and referral system (enforced by the purchaser), the introduction of performance bonuses and real independence of the FGPs would lead to a very different picture that would enable both parties to agree to contracts on the basis of real data. Until then, cost calculation would not be very useful, and the only consideration should be that primary care doctors and nurses receive sufficient personal income to stay in the profession.

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ANNEX B -