By defining what services, patients, and providers are eligible for payment, a provider payment system also inherently defines the degree of competitiveness in the market as well as the market boundaries. If the physician payments restrict which patients or services a doctor will be reimbursed for treating, this has important implications for incentives. Similarly, incentives are affected if some but not all hospitals receive DRG payments. A careful summary of all of the different ways of organizing health-care delivery markets lies well beyond the scope of this research paper; however, a brief discussion of delivery structure is important in determining incentives, costs, and outcomes.
Incentives
The previously discussed dimensions – the type of information used, the breadth, the fineness (or courseness), and the level of payments, as well as the market structure – all influence the incentives facing providers. Economists spend a great deal of time studying provider incentives because they generally believe the empirical evidence that providers respond to these incentives. This section describes the incentive effects of different payment systems commonly used around the world.
Incentives Created By Salaries And Fixed Budgets
Perhaps the easiest incentives to describe are those of salaried or fixed payment systems, where only provider information is used to calculate payments. Because revenues are fixed regardless of the volume of care rendered, physicians and hospitals have a financial incentive to inappropriately keep costs and costly effort at levels that are too low. Fixed revenues can also motivate physicians and hospitals to preferentially treat low-risk patients, to try to avoid high-cost patients, to make too many referrals, to minimize the number or intensity of services provided, and in general to underprovide quality. The one countervailing force is the possible threat to lose one’s job, but countries that rely on salaried payments rarely fire salaried employees. Peer review and payer monitoring may also be effective at promoting quality.
Payments based solely on provider characteristics do not tend to reward coordination of care across providers. Salaried or fixed hospital budget systems rely on provider altruism to ensure that appropriate and high-quality services are provided. However, if providers realize cost savings from preventive care, these payment systems may encourage providers to engage in preventive efforts.
Incentives Created By Fee-For-Service
The incentives of fee-based payments are very different from those of salaried or capitated payments. Newhouse (2002) carefully summarizes the conventional economists’ and policymakers’ views that FFS payment mechanisms create poor incentives for controlling cost or quantity. Fee-for-service rewards physicians with more revenue for rendering more services, whether these services improve the health or well-being of the patient. Under FFS reimbursement, services that have little or no value to the consumer may be provided merely because they increase provider net income. Overprovision is likely to be a problem if the fee for a particular service is more than the incremental cost of that service to the provider. Carrin and Hanvoravongchai (2003) mention several instances in which FFS payment systems caused the overprovision of services and thus caused a country’s health-care costs to rise. For example, in 1987, when general practitioners in Copenhagen began to receive fees for some services, the provision of those services increased significantly. However, with fee-for-service, underprovision may occur if fees are too low relative to costs. For similar reasons, services not reimbursed through fees, such as preventative care counseling to the consumer (e.g., trying to change a patient’s lifestyle or institute a smoking cessation program) receive little or no physician effort. Competition and consumer information also affect incentives of fee-based payments.
Incentives Created By Pure DRGs And Capitation
Under pure DRGs, hospitals have a financial incentive to discharge a patient early since they will not be reimbursed for the additional costs they incur on behalf of the patient. If payments are relatively generous, then hospitals may compete to attract more patients. However, hospitals may discourage patients with less generous payments. DRGs also create incentives to play the system for their own benefit; providers may ‘upcode,’ or classify patients into a higher DRG category, in order to receive a higher payment.
Capitation payments give physicians a fixed amount of money per patient, which creates a financial incentive to reduce costs per patient. Rather than necessarily managing care, capitation may instead result in providers competing to attract or select low-risk patients, using referrals, or providing preventative care. Here, how competition is regulated will clearly matter. Capitation creates an incentive to potentially use low-cost providers, increase outpatient services, reduce hospital admissions, and reduce days per admission. In addition, capitation creates incentives for the recipient of the capitated payment to increase the use of lower-cost alternative providers such as nurse practitioners and physician assistants, rather than physicians.