Incentives and Provider Payment Methods [in the health sector]

The mode of payment creates powerful incentives affecting provider behavior and the efficiency, equity and quality outcomes of health finance reforms. This paper examines provider incentives as well as administrative costs, and institutional conditions for successful implementation associated with provider payment alternatives. The paper focus on payments by institutions (third parties) to providers. The alternatives considered are budget reforms, capitation, fee-for-service, and case-based reimbursement. We conclude that competition, whether through a regulated private sector or within a public system, has the potential to improve the performance of any payment method. All methods generate both adverse and beneficial incentives. Systems with mixed forms of provider payment can provide tradeoffs to offset the disadvantages of individual modes. Low income countries should avoid complex payment systems requiring higher levels of institutional development. [author]