Understanding Payment Reform

What Are the Different Types of Payment Methods and Reforms?

Today, health care payment in the United States falls into four different categories:

  • Fixed payments (e.g. salaries)
  • Activity based payments (e.g. fee for service, per diems, DRGs, or episodes of care payments)
  • Population based payments (e.g. global capitation to an organization)
  • Incremental payments (e.g. pay for performance, care coordination fees, or shared savings/risk).[1]

The vast majority of payment reform efforts today fall into the last three categories.  Most payment reforms are built upon fee for service (FFS), meaning that FFS payments to providers continue as usual, but additional incremental payments are available to providers who meet various quality or spending targets.  The minority of payment reforms place providers at financial risk for overspending or not meeting quality goals; however, these are likely to increase as private and public health care purchasers continue to seek ways to improve the quality of care and contain costs. There is limited research on payment methods and there is a need for consistent and rigorous evaluation to determine which approaches produce desired results.[2]


What Issues Can Affect the Success of Payment Reform?   

All payment methods have strengths and weaknesses that are affected by the potential substantial operational challenges of implementation, including those posed by the context or environment in which the method is implemented. The specific design of the payment method, including the relative size of the payments, can also affect providers’ behavior. By understanding these strengths and weaknesses, payment reforms can be designed to maximize value and mitigate risk. Often the best way to achieve this is to develop mixed or hybrid payment models.[3] It may also be relevant to examine the financial incentives posed to consumers by benefit designs to see if they can work to support the same goals expressed to health care providers through payment methods.


Example of a Payment Method’s Strengths and Weaknesses:

Capitation is a prospective unit of payment per patient, per month or year, in which a payer makes a fixed payment for a defined set of services, regardless of the quantity of services actually provided. A strength of this method is that it incentivizes providers to limit the provision of unneeded services. A drawback is that it may lead to stinting on care that can be forgone without compromising the patient’s wellbeing in the short term.[4]


Operational Challenges:

Condition-based payment as a form of population-based payment has strong appeal by providing a packaged payment for all of the services for a patient with a particular condition. However, it may not be operationally feasible to implement, especially for patients with multiple chronic conditions. Even when one uses state-of-the-art episode groupers, the vagaries of diagnosis classification raise practical concerns about the reliability of identifying conditions and services related to those conditions.[5]


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[1] http://www.urban.org/research/publication/typology-payment-methods

[2] http://catalyzepaymentreform.org/images/uploads/CPRHowToGuideEvaluatingPaymentReformPrograms1215.pdf

[3] http://www.urban.org/sites/default/files/001_introduction_0.pdf

[4] http://www.urban.org/research/publication/payment-methods-how-they-work/view/full_report

[5] Too be released: “Refining the Framework for Payment Reform” Berenson et al.

[6] http://www.chcf.org/~/media/MEDIA%20LIBRARY%20Files/PDF/PDF%20P/PDF%20PhysicianHospitalIntegrationEraHealthReform.pdf

[7] http://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=1135&context=hlp

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