Provider Payment Methods and Incentives

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Book Chapter

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Diverse provider payment systems create incentives that affect the quantity and quality of health-care services provided. Payments can be based on provider characteristics, which tend to minimize incentives for quality and quantity. Or payments can be based on quantities of services provided and patient characteristics, which provide stronger incentives for quality and quantity. Payment methods using both broader bundles of services and larger numbers of payment categories are growing in prevalence. The recent innovation of performance-based payment attempts to target payments on key patient attributes so as to improve incentives, better manage patients, and control costs.

There are many ways that health-care providers can be paid. In India, government physicians are paid a salary, and in Canada, physicians are generally paid according to a government-regulated fee schedule. In the Netherlands, office-based physicians receive capitated payments for much of their revenue, while in the United States most doctors can negotiate fees for each service with each of many competing health plans. Similar variations are seen in payments to hospitals, which may be paid using fixed budgets, detailed fee schedules, or episode-based systems. In this article we develop a conceptual framework for thinking about methods of provider payment, focusing on payments to primary care doctors and to acute care hospitals. Both the way payments are made and the market setting can affect the cost, quantity, and quality of care provided. Therefore, we also discuss how payments affect incentives. The final section discusses recent payment systems that reward selected performance measures.

The focus of this article is on payments made to providers by social health insurance, private health insurance, other health plans, governments, or employers. Since these payments are not made by consumers, economists call them supply-side payments. Demand-side payments (often called cost sharing) are those made by consumers directly to providers. Cost sharing is discussed elsewhere in this volume. Clearly provider compensation and incentives are impacted by both supply- and demand-side payments, but this article focuses on supply-side payments only.

We begin by considering four broad dimensions of provider payment. The first dimension is the type of information used to calculate payments. The second dimension is the breadth of provider payment: Are doctors and hospitals paid narrowly for their own services, or are they paid broadly for bundles of related services, such as laboratory tests and other provider services? The third dimension of payment is the fineness of the payment classification system used: Are there relatively few payment categories or are there many? The fourth dimension is the generosity of the payments: Are payments low or high? We briefly consider each of these dimensions and how common payment systems utilize each element. After payment dimensions are introduced, we discuss the incentive properties of each method of payment. An innovation is that we present these dimensions of provider payment visually in a figure that distinguishes the main features of providers' payments in different countries and for different services.