Our own project · Meridian Hospital Group is a constructed operator; the instrument and its figures are real
Meridian Hospital Group · Costing and charging
What it costs, and who pays for what
A hospital’s cost per case is partly an accounting convention, and every way of paying a provider rewards something different from what the patient is judging. Both matter enormously to where you build.
Two questions sit underneath the choice of where to build, and they are usually treated as finance department detail rather than as strategy. What does a hospital actually cost to run, and who pays it for what.
Both turn out to be less solid than they sound. A hospital’s cost per case is partly a convention, and every method of paying a provider buys something slightly different from what the patient came for. A group choosing a jurisdiction is choosing which of those distortions it will live inside for sixty years.
Chapter 1 · Costing
What it costs is partly an accounting convention
Direct costs are straightforward. The implant, the drug, the hours of the people in the room. Everything else in a hospital is shared: the building, the heating, the laboratory, the switchboard, the medical director, the insurance. Those shared costs are far larger than the direct ones, and getting them onto individual patients requires apportionment.
Apportionment is a choice. Spread theatre overhead by minutes used and one case looks expensive; spread it by number of cases and the same operation looks cheap. Neither is wrong. They are different conventions producing different answers about the same afternoon, and a service line can move from profitable to loss making without anything happening in the hospital at all.
Patient level costing does this properly, tracing resources to individuals rather than averaging departments, and it is genuinely better. It is also expensive, requires the record keeping most hospitals do not have, and is still full of allocation choices that somebody made and nobody wrote down. Which is precisely why every figure on this site carries its basis. A cost per case without its method attached is not a measurement, it is an opinion with a decimal point.
Two consequences follow for Meridian directly. The first is that a buyer’s adviser will reconstruct these numbers their own way at diligence, so the method has to survive being redone by somebody hostile. The second is that the group cannot know which service lines are worth building until it knows how it is apportioning, and that decision is usually made by default rather than deliberately.
Chapter 2 · Charging
Seven ways to pay a hospital, and what each one buys
There are only a handful of underlying ways to pay a provider. Every real system is a blend of them, and every blend is an argument about which distortion is most tolerable.
Read each one against the ten things the patient wants. The pattern is not subtle: payment follows activity, episodes or enrolment, and none of those is the thing the patient is judging.
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Fee for service
Paid per item done- Pays for
- Each consultation, test, procedure and night, priced separately.
- Therefore rewards
- Doing more. Every additional activity adds revenue and the marginal cost is usually lower than the marginal price.
- And distorts toward
- Toward volume regardless of benefit, and toward the profitable procedure over the conversation that would have avoided it. Nothing pays for deciding a patient does not need something.
- Seen in
- United States commercial and Medicare physician payment, Australian MBS, private practice almost everywhere, and most of the Nigerian private sector.
-
Per diem
Paid per night- Pays for
- Each day the patient occupies a bed, at a rate by ward type.
- Therefore rewards
- Longer stays, and filling beds with patients who need little.
- And distorts toward
- Directly against the patient on item six of their list. The one payment model whose incentive is to keep somebody in hospital.
- Seen in
- Historic in most systems, still present in parts of Japan, Germany and much of the private sector in emerging markets.
-
Case payment, DRG or tariff
Paid per episode, priced by diagnosis group- Pays for
- A fixed sum per admission based on what was wrong and what was done, regardless of how long it took.
- Therefore rewards
- Short stays, efficient pathways, and accurate coding of complexity.
- And distorts toward
- Toward discharging at the point the tariff runs out rather than the point of recovery, toward coding intensity, and away from patients whose complexity the grouping does not capture.
- Seen in
- German G-DRG, French T2A, the English national tariff by HRG, Australian activity-based funding, Medicare inpatient payment.
-
Block contract or global budget
Paid a sum for the year- Pays for
- A fixed amount to provide a service, largely independent of how much of it is provided.
- Therefore rewards
- Nothing in particular, and penalises nothing in particular.
- And distorts toward
- Toward using the waiting list as the release valve, because the queue is the only variable that is free to the provider. Activity above plan costs money and earns none.
- Seen in
- Canadian provincial hospital budgets, Nordic systems, and English blended payment which is a block with an activity adjustment.
-
Capitation
Paid per registered person per year- Pays for
- A sum for each person on the list, whether they attend or not, usually weighted for age and need.
- Therefore rewards
- Keeping people well and out of the building, which is the only model that pays for prevention.
- And distorts toward
- Toward under-provision and toward avoiding expensive patients, unless the weighting is good and somebody is checking.
- Seen in
- English general practice under the Carr-Hill formula, US managed care and Medicare Advantage, Dutch primary care.
-
Pay for performance
Paid a bonus against indicators- Pays for
- A margin on top of the base model for hitting quality or outcome measures.
- Therefore rewards
- Whatever has been chosen as the indicator.
- And distorts toward
- Toward the measurable and away from everything else, and toward gaming where the indicator is weak. It is a multiplier on the measurement problem rather than a solution to it.
- Seen in
- US MIPS and value-based purchasing, the former English QOF in general practice, increasingly bolted onto tariff systems everywhere.
-
Bundled payment over an episode
Paid once for the whole thing- Pays for
- A single sum covering the pathway from referral or admission through to recovery, including complications and readmission.
- Therefore rewards
- Getting it right first time, and the parts of the pathway that happen outside the hospital.
- And distorts toward
- Toward selecting straightforward patients, and it is genuinely hard to define and price. But it is the only archetype whose denominator resembles the one the patient is actually using.
- Seen in
- US bundled payment initiatives, Dutch integrated care bundles, Swedish hip and knee arrangements. Still the minority everywhere.
Chapter 3 · The gap, again
None of them pay for what the patient is judging
The patient page sets out a satisfactory outcome in the patient’s own terms: I got my life back, in a reasonable time, without being harmed or humiliated, and I understood what was happening throughout. Take that sentence to the list above and see what any of them pay for.
Fee for service pays for the things done to you, which is not the same as getting your life back. Case payment pays for the admission, which is the middle thirteen per cent of the episode. Capitation pays for you existing on a list. Block contracts pay for a service to exist. Pay for performance pays for whichever fragment somebody chose to measure.
Not one of the seven pays for being told what it is, for somebody owning the case, or for not having the rest of your life wrecked getting treatment. Those are items two, nine and seven, and they are unpurchased in every payment system in the world. This is the same denominator problem the patient page describes, now visible in the money rather than only in the measurement.
Bundled payment over a whole episode is the only archetype that even attempts the patient’s denominator, and it is the least used, because defining and pricing an episode is hard and every existing institution is organised around the fragments instead.
Chapter 4 · Payer mix
Who actually pays, and why it decides everything here
Before the payment model comes a blunter question: whose money is it. In most developed systems the patient is not the payer. Somebody else, a state, an insurer or a sickness fund, stands between them and the bill, negotiates the price and bears the risk.
In Nigeria that intermediary is largely absent.
Figures from the World Bank out of pocket expenditure indicator and the WHO Global Health Expenditure Database, with the comparison drawn from Our World in Data.
Chapter 5 · Eleven systems
How the major jurisdictions actually do it
Who pays, how the hospital is paid, and how the clinicians are paid, which are three separate questions that are constantly confused. A country can have a single public payer and fee for service doctors, as Canada does. It can have private insurance and salaried hospital staff. The combinations matter more than the label on the system.
| Jurisdiction | Who pays | How the hospital is paid | How clinicians are paid |
|---|---|---|---|
| United Kingdom | General taxation, single payer | Blended payment: a fixed element plus a variable element against activity, replacing the pure national tariff paid by HRG | Consultants salaried on a national contract measured in programmed activities. GPs are independent contractors paid by weighted capitation. |
| United States | Multi-payer: employer insurance, Medicare, Medicaid, and the uninsured | Medicare pays DRG per admission. Commercial rates are negotiated privately and vary several fold for the same procedure in the same city. | Predominantly fee for service on a relative value scale. Employed physicians are commonly paid on productivity units derived from the same scale. |
| Germany | Statutory sickness funds, Bismarck model | G-DRG per case for operating cost. Capital is funded separately by the states, which is dual financing and a persistent source of underinvestment. | Hospital doctors salaried. Ambulatory physicians paid from a capped regional pool on a points scale, so the value of a point falls as colleagues do more. |
| France | Statutory health insurance plus complementary cover | T2A, activity based tariff per stay, with supplementary funding for teaching and specific missions | Public hospital doctors salaried. Private practice fee for service against a negotiated schedule, with regulated extra billing. |
| Netherlands | Mandatory private insurance, managed competition | Care products negotiated annually between each insurer and each hospital, so price varies by contract | Specialists in self-employed partnerships or salaried, with a long running argument about which produces better behaviour. |
| Australia | Medicare, tax funded, plus substantial private insurance | Activity based funding at a National Efficient Price for public activity. Private hospitals paid by insurers per episode. | Fee for service on the Medicare Benefits Schedule, with public hospital work salaried or sessional. |
| Canada | Single provincial payer | Global budgets set provincially, with activity based funding in parts of some provinces | Overwhelmingly fee for service against provincial schedules negotiated with the medical associations. |
| Japan | Statutory insurance, universal | A national fee schedule set centrally and revised on a two year cycle, with a per diem case mix system for inpatients | Salaried in hospitals. The national schedule is the principal instrument of cost control in the entire system. |
| Singapore | Compulsory medical savings, catastrophic insurance and a safety net, with means tested subsidy | Subsidy varies by ward class, so the patient chooses their level of subsidy and co-payment | Mixed salaried and productivity linked. Co-payment is deliberate policy rather than a funding gap. |
| United Arab Emirates | Mandatory employer provided insurance | Moving to DRG based payment in Abu Dhabi and Dubai, from fee for service | Mixed salaried and productivity based, in a market competing hard for internationally trained staff. |
| Nigeria | Predominantly the patient, directly, at the point of care | Paid by the patient or family, usually in advance. Insurance coverage exists and is small. Package rates apply where a scheme is in place. | Salaried in public service at rates that drive emigration, and fee for service or salaried in a private sector that sets its own prices. |
summary: a structural characterisation rather than a specification. Payment rules in every one of these systems change frequently, and several are mid-reform at the time of writing.
Chapter 6 · Back to the siting question
What this means for the decision in front of the board
Three things follow for Meridian, and they are not the ones a market study would put first.
The customer is different. In Nigeria the patient is the payer, which means no negotiated tariff, no insurer defining the product, and no third party absorbing bad debt. The commercial relationship is direct, prices are set by the provider, and collection is a real operational function rather than a back office one. That is closer to running a hospital in 1930 than to running one in Munich, and it is why price transparency and trust matter more there than any amount of accreditation.
The distortion is different. A direct pay market is fee for service by default, so the incentive is toward volume and toward the profitable procedure. Meridian’s stated values commit it to taking waste rather than relief, and this is exactly the market where that commitment costs money rather than earning applause. A group that means it will have to build internal controls against its own revenue model.
And the exit is different. A hospital sold in a tariff system comes with predictable revenue a buyer can model. A hospital sold in a direct pay market comes with a demand curve, a collection rate and a reputation, all of which are harder to evidence and easier to doubt. For a company whose product is demonstrated performance, that raises the standard of proof rather than lowering it, and it is an argument for running the whole thing before committing rather than against building there at all.