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Energy Boardroom

Improving Healthcare Provider Payment Methods in Russia

23.04.2014 / Maria Sdvizhkova, Head of Consulting Department at Aston Consulting for

photo-maria-sdvizhkova-ac-Introducing new reimbursement systems

As of January 1, 2014 Russia introduced a new method of payment for inpatient medical services delivered under the Compulsory Health Insurance program (OMS). A new provider payment system based upon diagnosis-related groups (DRG) will now replace the previous model wherein the reimbursement of hospitals was mainly based on per diem fees.

The OMS program is a full-scale social insurance system that covers the costs of health care for those who are enrolled if the insured becomes sick due to a covered cause. It is part of the Government Guarantees Program of Free Medical Care (GGP) which is the primary public health program in Russia. Through it, the type and volume of health services provided to the population, categories of citizens eligible for free medical care, sources and regulatory mechanisms of funding are all defined. GGP serves as a regulatory framework for the public healthcare sector in Russia.

Financing for the OMS program is achieved mainly through payroll contributions from the working population and insurance premiums for the unemployed population which come from the constituent territories of the Russian Federation. In 2014, the OMS budget totals 38 billion rubles, which accounts for 62% of the GGP expenditure (the remaining 38% are the funds allocated from federal and regional budgets).

Prior to 2014, the OMS system was paying hospitals on a per diem basis, in which case the amount of reimbursement was dependent on the actual number of days the patient spent in a health institution (the so-called “bed-day remuneration”). This approach was associated with certain pitfalls given that medical facilities had little incentive to improve treatment outcomes or reduce the length of stay, “hanging on” to patients longer than was needed.

It was also common practice for patients who could be successfully managed in an outpatient setting to be unnecessarily institutionalized. Ultimately, this resulted in unreasonably large expenditure on hospital care and contributed to high bed occupancy rates, limiting admissions and increasing waiting times.

Developing treatment guidelines
Striving to improve the quality and accessibility of inpatient care, in 2012 the Russian Ministry of Healthcare and Social Development designed and introduced around 800 federal standards of medical care that provide treatment guidelines for all main classes of disease to help determine the average cost of treating a patient with a specific disease type. The following year these standards became the core regulatory instrument of the GGP and was made mandatory for all hospitals across the country when delivering medical care within the GGP framework.

The standards of medical care include the list and average frequency of utilization of various medical services and procedures that may potentially be used to treat a typical case of each listed disease. Besides serving as benchmarks for quality control, these standards are also crucial for health economics to calculate the volume of medical care and funding to be allocated for the different disease groups under GGP.

At the same time, according to Minister of Healthcare Veronika Skvortsova, the standards were just an interim cost calculation tool on the way to adopting a more effective and innovative method of tariff setting – what would later become the DRG-based payment system.

The payment method based on diagnosis-related groups makes it possible to distribute funds in a more targeted way, directing resources to a specific medical institution. It is a cost-effective mechanism which links reimbursement to reaching clinical performance targets                              – Minister of Healthcare Veronika Skvortsova

The origins of diagnosis-related groups

Diagnosis-related groups originated in the U.S. in the late 1970s, and were initially designed as an informational tool to monitor the utilization of resources per patient treated over the course of hospitalization. Over time, studies have shown that the DRG-based approach is most efficient when calculating the total amount of resources required to treat patients in a given hospital. DRG payment systems were first implemented in the United States as part of the Medicare Program in 1983.

Today, global health care experts agree that using DRG-based methods for reimbursement of hospital care is economically efficient and fair. They are currently adopted by over 50 countries and that number is growing. Nonetheless, there is great diversity in the specific design features of these systems as different countries view the ultimate objectives of DRG application differently. For example Sweden and Finland use this system as a measure for assessing a hospital’s casemix, while in USA, France and Germany DRGs are used mostly for setting payment rates with regard to hospital care.

In any case, DRG-based systems has several obvious advantages (transparency of inpatient services, efficient resource-consumption patterns, reducing the number of bed-days and the overall number of hospitals, attracting private health institutions to cooperate with public sector) regardless of expectations. Such expectations result in improved quality of medical care or at least mainting it at an appropriate level.

The multiple benefits and proved effects of a DRG-based payment method for the reimbursement of hospital care have spurred attempts to make it an important part of the Russian health care policy at the present stage.

Current state of Russian Healthcare
Today only 35% of Russian citizens are satisfied with the quality of health care available to them. Russia is at least 10 years behind OECD countries in terms of average life expectancy while the case fatality rate for certain socially significant diseases exceeds that in OECD countries by more than two times (e.g. mortality from cardiovascular diseases). There are also issues associated with ineffective use of available resources, including financial resources.

Being determined to respond to these challenges and improve the Russian health care system, President Vladimir Putin issued a number of decrees in May 2012 setting targets with regard to medical service delivery to the population, quality of care and social and demographic indicators (including birth rate, expected lifespan, and mortality).

To achieve these goals before the end of the reporting period (2018) several government programs and measures were designed to improve the level of Russian health care with the focus on increasing the quality of medical services and optimizing costs under the present funding pattern. These programs are a pivotal part of the current government health policy.

A DRG-based hospital payment system was introduced in Russia for the first time in 2009 and involved five constituent territories where it was introduced as part of the regional initiatives in health care. In 2013, the implementation of the system was underway in 34 pilot regions of the Russian Federation.

At the state level, the DRG methodology has been developed by the Ministry of Healthcare of the Russian Federation in collaboration with experts from the World Bank from 2011-2013. In 2013, the DRG-based mechanism was spelled out in the documents of the Government Guarantees Program as an alternative way of remuneration for hospital care and from January 1, 2014 it has become the only reimbursement option for all hospitals, providing patient care under the OMS program (Government Decree № 932 “the state guarantees for the provision of free medical care to citizens in 2014 and the planning period of 2015 and 2016″).

DRG implementation in Russia
In November 2013 the Federal OMS Fund approved  “Guidelines on the available payment methods for specialized medical care in the inpatient and day care facilities based on disease groups, including diagnosis-related groups (DRGs) and clinical-profile groups (CPGs) to be covered at the expense of compulsory health insurance system” (Government Order № 229). Currently, 201 diagnosis-related groups within the 36 clinical-profile groups have been developed and approved in Russia, including all disease classes according to ICD-10, which are funded under the OMS program.

Patients are assigned to a certain clinical-profile group based on a disease area (nosology). The cases classified as belonging to a particular DRG are characterized by homogenous clinical features, similar procedures and resource-need patterns.   Also, such variables as previous surgeries (or absence thereof), patient age and the presence of co-morbidities and complications are taken into account.

The monetary value is attached to a specific DRG within the framework of the Territorial Government Guarantees Program and consists of the following components: base rate, cost weight and various adjustment factors (e.g. challenging patient management).  Additional factors such as average length of hospital stay and tariff structure (the ratio between staff salaries and the cost of medicines and consumables within DRG cost) are to be defined for each particular diagnosis-related group.

The DRG payment formula including adjustment factors is annually negotiated between the Territorial OMS Funds, insurance companies and medical institutions in the region and is supposed to be spelled out in the tariff agreement included in the Territorial GGP. The list and amount of predefined DRGs can be updated and expanded at the regional level.

The volume of funding to be provided for inpatient care under Territorial GGP shall be calculated based on the DRG cost, the number of treated cases and projected share ratio of each DRG across different medical facilities. Last year, the overall financial resources allocated for hospital care in Russia amounted to about 30.4 billion dollars (56% of the GGP budget, including subsidies for drugs for benefit recipients).

The reduction in financing of the hospital segment from the GGP budget is the key purpose of changing provider payment methods and the introduction of DRGs in Russian hospitals operating under the OMS scheme. The other important targets include improved quality and availability of medical services and ensuring effective and transparent reimbursement mechanism for all involved parties under single-channel financing of health institutions.

Managing costs of the new healthcare system
Single-channel financing is the new mechanism designed to cover all types of medical services and drug provision within the GGP framework from a single funding source – the OMS Fund.

Today, the OMS program provides financing for the following areas of health care:

  • Primary medical care, including preventive health checks;
  • Specialized medical care, excluding STD, TB, and HIV;
  • Medical rehabilitation;
  • Emergency medical care, excluding specialized emergency care (civil aviation medical services)
  • Several  selected treatments under High-Tech Medical Care program (HMC) which have previously been part of the dedicated federal program covering most complex and costly medical technologies (starting from 2014)

Starting in 2015, the OMS will be funding a full range of HMC treatments, whereas socially significant diseases (STD, TB, HIV, etc.) are scheduled to become its responsibility after 2016. Eventually, the OMS program will incorporate all the medical services provided under GGP, which will make OMS Fund the single funding channel for reimbursement of free medical care in Russia.

The planned strategies to streamline costs of the hospital segment primarily focus on reducing the duration of hospital stay since with the introduction of DRGs, stipulating length of hospitalization for particular conditions, there will be no incentive for medical facilities to keep the patient in a hospital longer than required by medical indications. Reducing the time of hospitalization, in turn, should lead to an increased patient flow and improved access to hospital care.

Relying on an average standardized cost of cases within the DRGs should become a motivation for hospitals to enhance efficiency and reduce input expenditures because the deviation of actual treatment cost from the one determined in a particular DRG would be classified as profit or loss for the given medical facility.

Evaluating the DRG system in Russia
The assessment of the potential for a DRG-based system performed in some pilot regions in 2013, demonstrated a moderate decrease in the length of stay by 11.1%, an increase in the number of treated patients by 4.5%. Also, the number of sophisticated treatments and surgeries has risen somewhat compared to previous period of 2011 (approximately 5.5% on average).

Of course, changing the payment mechanism and putting DRGs in place is far from straightforward and involves certain risks and challenges. For example, remuneration based on finished cases within predefined rates may create a situation where hospitals in order to save on input costs and to claim additional reimbursement may be tempted to decline admission to severely ill patients that would cost substantially more than average and discharge them more quickly to make room for other patients.  Certain abuses in diagnosing health conditions are also possible, like intentional augmentation of case severity and the desire of some physicians to reclassify the patients into more expensive categories.  Eliminating these risks requires careful monitoring of the new system adaptation on the part of public authorities, the OMS Fund and insurance companies.

In addition to the abovementioned risks, there are organizational issues relating to adoption of a DRG-based payment method. First of all, it concerns putting the system in practice in the regions that have not had any previous experience in dealing with it since the recommendations developed by OMS Fund don’t offer detailed guidelines or a specific implementation algorithm and additional training for them is necessary. Also, experts point out the insufficient number of generated case groupings (international experience suggests 1000-1200 groups, while Russia has only defined 201 DRGs so far) and the lack of a unified system of assessment of actual costs incurred by health institutions, which makes it hard to determine fair rates and weight costs for each specific DRG.

Implications for the pharmaceutical sector
From the pharmaceutical business perspective, the current changes pose potential risks as well as additional opportunities for companies operating in the Russian hospital segment. On the one hand, the optimization of hospital care will entail reduction of hospital beds (mainly because they will be converted for rehabilitation care purposes) and possible dissolution of hospitals. The chosen strategy to enhance the outpatient segment will bring about the revision of the GGP funding structure: the proportion of inpatient care will be diminished (although in absolute terms this reduction is going to be insignificant) and in the long run the patient flow will decrease due to projected changes in morbidity, resulting from government’s commitment to boost prevention and healthy behaviors.

On the other hand, the forecast regarding the rising patient flow in hospitals in the short term suggests a certain growth in the hospital segment of the pharmaceutical market (at least in volume terms).  Establishing standards of medical care, the unification of costs for health services and improved transparency of the OMS scheme attract a larger number of private health institutions to cooperate with the OMS Fund. The incorporation of High-Tech Medical Care in the OMS program and as a result the gradual increase in the patient flow over a two- or three-year period, due to elimination of tight quota system  can be viewed as another opportunity for the pharmaceutical business .
According to experts, the complete transition to a DRG-based payment mechanism within the OMS framework will take place not sooner than 4-5 years, bearing in mind the required adaptation and “tuning” of the system to make it more clear and transparent for all stakeholders in Russia, especially at the regional level.

As such, to operate a successful business in the Russian hospital market, pharmaceutical companies need to keep track of emerging aspects and trends, since Russia is currently in the midst of reforming its health care system.



Aston ConsultingAston Consulting today offers state-of-the-art technologies and reliable data for efficient and innovative business solutions. Among our customers are drug manufacturers, pharmacy chains, medical and patient communities, government agencies, and professional associations operating in the health care market.

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