How to Pay: Understanding and Using Incentives

Many countries have experimented with alternative ways of paying providers of health care services. This paper illustrates different methods, suggests some of the theoretic advantages and limitations of each, and provides a general theoretical framework for evaluating alternatives. Over the last two decades, new and more sophisticated payment systems have evolved, with a broadening of units of payment and setting of payments prospectively. The authors discuss the international experience of a number of payment systems, both traditional and more recently developed, including line-item budgeting, salary, fee-for-service, per diem, case-mix adjusted per episode, global budgets and capitation. The authors argue that no one set of incentives will address the multiple objectives of purchasers, providers, and patients. As a result, purchasers and policymakers must understand and address policy objectives explicitly. [abstract]