Publication: How to Pay? Understanding and Using Incentives

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Langenbrunner, John C.
Xingzhu, Liu
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. With more sophisticated systems, part or all of the financial risk is transferred from the purchaser back to the provider and patient. Most observers caution against full risk but encourage some supply-side cost sharing only, with purchaser and provider sharing in risk arrangements to address moral hazard issues. Imposing high copayments or user fees is an alternative, but in developing countries that quickly erodes financial protection. More sophisticated payment systems may also lead to higher transaction costs and necessitate a greater capacity to use information and management systems. Finally, the best planned and implemented payment incentives and systems may fail due to a variety of other and related factors in health care delivery. Unless these issues are addressed, impacts of change in resource allocation and purchasing will be diluted or neutralized. Technicians and policymakers will need to address these potential "chokepoints" in any process of implementation and refinement.
Langenbrunner, John C.; Xingzhu, Liu. 2004. How to Pay? Understanding and Using Incentives. Health, Nutrition and Population (HNP) discussion paper;. © World Bank, Washington, DC. License: CC BY 3.0 IGO.
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