Health services providers receive payments mostly from private or public insurers rather than patients. Provider incentive problems arise because an insurer misses information about the provider and patients, and has imperfect control over the provider’s treatment, quality, and cost decisions. Different provider payment systems, such as prospective payment, capitation, cost reimbursement, fee-for-service, and value-based payment, generate different treatment quality and cost incentives. The important issue is that a payment system implements an efficient quality-cost outcome if and only if it makes the provider internalize the social benefits and costs of services. Thus, the internalization principle can be used to evaluate payment systems across different settings. The most common payment systems are prospective payment, which pays a fixed price for service rendered, and cost reimbursement, which pays according to costs of service rendered. In a setting where the provider chooses health service quality and cost reduction effort, prospective payment satisfies the internalization principle but cost reimbursement does not. The reason is that prospective payment forces the provider to be responsible for cost, but cost reimbursement relieves the provider of the cost responsibility. Beyond this simple setting, the provider may select patients based on patients’ cost heterogeneity. Then neither prospective payment nor cost reimbursement achieves efficient quality and cost incentives. A mixed system that combines prospective payment and cost reimbursement performs better than each of its components alone. In general, the provider’s preferences and available strategies determine if a payment system may achieve internalization. If the provider is altruistic toward patients, prospective payment can be adjusted to accommodate altruism when the provider’s degree of altruism is known to the insurer. However, when the degree of altruism is unknown, even a mixed system may fail the internalization principle. Also, the internalization principle fails under prospective payment when the provider can upcode patient diagnoses for more favorable prices. Cost reimbursement attenuates the upcoding incentive. Finally, when the provider can choose many qualities, either prospective payment and cost reimbursement should be combined with the insurer’s disclosure on quality and cost information to satisfy the internalization principle. When good healthcare quality is interpreted as a good match between patients and treatments, payment design is to promote good matches. The internalization principle now requires the provider to bear benefits and costs of diagnosis effort and treatment choice. A mixed system may deliver efficient matching incentives. Payment systems necessarily interact with other incentive mechanisms such as patients’ reactions against the provider’s quality choice and other providers’ competitive strategies. Payment systems then become part of organizational incentives.
Ching-to Albert Ma and Henry Y. Mak
André Medici and Maureen Lewis
Latin American and Caribbean (LAC) countries have experienced a long-term process of improvement in populational health conditions, shifting their health priorities from child–mother care and transmissible diseases to non-communicable diseases (NCDs). However, persistent socioeconomic inequalities create barriers to achieve universal health coverage (UHC). Despite a high level of governmental commitment to UHC, and rising coverage, approximately 25% of the population does not have access to healthcare, particularly in rural and outlying areas. Health system quality issues have been largely ignored, and inefficiency, from health financing to health delivery, is not on the policy agenda. The use of incentives to improve performance are rare in LAC health systems and there are political barriers to introduce reforms in payment systems in the public sector, though the private sector has opportunity to adapt change. Fragmentation in the financing of healthcare is a common theme in the region. Most systems retain social health insurance (SHI) schemes, mostly for the formal sector, and in some cases have more than one; and parallel National Health System (NHS)-type arrangements for the poor and those in the informal labor market. The cost and inefficiency in delivery and financing is considerable. Regional health economics literature stresses inadequate funding—despite the fact that the region has the highest inequality in access and spends the most on healthcare across the regions—and analyzes multiple aspects of health equity. The agenda needs to move from these debates to designing and leveraging delivery and payment systems that target performance and efficiency. The absence of research on payment arrangements and performance is a symptom of a health management culture based on processes rather than results. Indeed, health services in the region remain rooted in a culture of fee-for-service and supply-driven models, where expenditures are independent of outcomes. Health policy reforms in LAC need to address efficiency rather than equity, integrate healthcare delivery, and tackle provider payment reforms. The integration of medical records, adherence to protocols and clinical pathways, establishment of health networks built around primary healthcare, along with harmonized incentives and payment systems, offer a direction for reforms that allow adapting to existing circumstances and institutions. This offers the best path for sustainable UHC in the region.
Diane McIntyre, Amarech G. Obse, Edwine W. Barasa, and John E. Ataguba
Within the context of the Sustainable Development Goals, it is important to critically review research on healthcare financing in sub-Saharan Africa (SSA) from the perspective of the universal health coverage (UHC) goals of financial protection and access to quality health services for all. There is a concerning reliance on direct out-of-pocket payments in many SSA countries, accounting for an average of 36% of current health expenditure compared to only 22% in the rest of the world. Contributions to health insurance schemes, whether voluntary or mandatory, contribute a small share of current health expenditure. While domestic mandatory prepayment mechanisms (tax and mandatory insurance) is the next largest category of healthcare financing in SSA (35%), a relatively large share of funding in SSA (14% compared to <1% in the rest of the world) is attributable to, sometimes unstable, external funding sources. There is a growing recognition of the need to reduce out-of-pocket payments and increase domestic mandatory prepayment financing to move towards UHC. Many SSA countries have declared a preference for achieving this through contributory health insurance schemes, particularly for formal sector workers, with service entitlements tied to contributions. Policy debates about whether a contributory approach is the most efficient, equitable and sustainable means of financing progress to UHC are emotive and infused with “conventional wisdom.” A range of research questions must be addressed to provide a more comprehensive empirical evidence base for these debates and to support progress to UHC.