Improving Service Delivery: A Question of Incentives
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and appropriateness of care. It should also prioritize basic but highly costeffective care and interventions, and promote a clearer and more suitable division of responsibilities between different levels of providers. This will require coordinated reforms of how insurers pay providers, the broader system of price regulation, and the system for financing and organizing public health functions.
Promoting Cost-Consciousness through New Payment Methods The key feature of fee-for-service payment is that providers get reimbursed for each specific item-of-service, affording doctors full discretion over the level and mix of services and treatment options. Although often popular with providers, fee-for-service payment does not create any incentive for providers to find the most cost-effective combination of services to address a particular patient’s need.55 One option for addressing the adverse incentives of fee-for-service would be to revert to a model in which services are provided by budgetary units, fully financed and operated by the public sector. In this arrangement, the government exercises direct control over the provider by focusing on inputs and process—that is, through the budget process and through administrative rules and regulations. As a result, hospital and clinic managers have few incentives to increase efficiency and improve quality. Moreover, the budget process often becomes historically driven, contributing to misallocation of resources and unproductive competition between providers to increase their budgets over time. Because of the weak incentives for efficiency and responsiveness, many health systems have moved away from this integrated model of service delivery. An arguably better option is to find alternative payment methods that reduce the incentive for overservicing and reward efficiency. One way to do so is to bundle different service items (and sometimes drugs) into a single fixed payment (key features of different payment methods are summarized in box 6.2). For inpatient care, an increasingly popular approach is to pay providers by the number of cases, with different reimbursement levels for different types of cases. The most prominent examples of this approach are the diagnosis-related groups developed in the US Medicare system in the early 1980s (Newhouse 2002). Subsequently, case-based payment systems have been developed, sometimes under different names, in a wide range of countries (Bitran and Yip 1998; Docteur and OECD 2004; Velasco-Garrido et al. 2005; Wagstaff 2007a).56 Under case-based payments, standard costs are calculated for different types of cases and are used to determine the level of provider