• Align financial incentives with the implementation of care processes based on best practices and the achievement of better patient outcomes. Substantial improvements in quality are most likely to be obtained when providers are highly motivated and rewarded for carefully designing and fine-tuning care processes to achieve increasingly higher levels of safety, effectiveness, patient-centeredness, timeliness, efficiency, and equity.

  • Reduce fragmentation of care. Payment methods should not pose a barrier to providers’ ability to coordinate care for patients across settings and over time.

The remainder of this chapter examines in greater detail the relationship between payment methods and the ability of health care organizations and professionals to undertake quality improvement activities. In the first section, the theoretical incentives of current payment methods are briefly reviewed. The second section focuses on barriers in the payment system that inhibit the achievement of significant improvements in quality. The third section describes how existing payment methods could be adapted to support quality improvement. Although difficult to accomplish in today’s environment, examples are provided to illustrate how some health care organizations are attempting to incorporate greater attention to quality in their payment arrangements. Any payment method can be improved to support quality. However, fundamental misalignments will remain; thus fixing current payment methods may be important, but not sufficient. The final section therefore explores the need for a new approach to payment policy that can better align the needs of patients with the unit and type of payment method.


Payment processes link together many different actors in health care. Purchasers, consumers and patients, health plans and insurers, and health care providers are all connected through various financial transactions (see Figure 8–1). Purchasers or funders of health care include public and private purchasers, such as employers and the Health Care Financing Administration; individual consumers and families; and federal, state, and local governments that may offer direct subsidies to certain providers (e.g., public hospitals) or for certain services (e.g., immunizations). Many purchasers buy coverage for their employees or covered populations through contractual arrangements with health plans or insurers. These health plans and insurers, in turn, contract with individual providers and/or provider groups to deliver health care services. In some cases, purchasers and providers may also be directly linked through contracting approaches under which employers contract directly with a provider group to deliver care.

Payment linkages also exist within the boxes shown in Figure 8–1. Purchasers and individuals are linked when purchasers provide a choice of coverage to

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