This chapter addresses rural health care finance in three broad areas. The first section examines pay-for-performance as a strategy for improving the quality of health care, as recommended in the Quality Chasm report (IOM, 2001). The second section reviews the various mechanisms used to fund rural health care services generally, while the third focuses on the special case of the funding of rural mental health and substance abuse services. The final section presents conclusions and recommendations.


There is now a large evidence base, as documented in the Quality Chasm report (IOM, 2001) and discussed in Chapter 3, to substantiate a sizable gap between the health care services people receive and the services they should receive based on acknowledged best practices. To encourage providers to improve quality, some private and public purchasers have begun implementing a key recommendation of the Quality Chasm report: to link payments to measures of performance.

Because this is a relatively new strategy, there is only limited evidence available on the effects of pay-for-performance programs on quality. The Stanford University and University of California-San Francisco Evidence-based Practice Center, funded by the Agency for Healthcare Research and Quality, has just completed a literature review to identify published randomized controlled trials of incentive systems (Dudley et al., 2004). Of 5,045 publications reviewed, only 9 report results of randomized controlled trials on incentive systems. Of these 9 studies, 8 involved using specific financial incentives as interventions and tested a total of 10 hypotheses (Christensen et al., 1999; Davidson et al., 1992; Fairbrother et al., 2001; Hickson et al., 1987; Hillman et al., 1998, 1999; Kouides et al., 1998; Roski et al., 2003). In 6 cases, the incentive being tested was associated with the desired and statistically significant changes in the delivery of quality care, while in the other 4 cases, there was no significant difference in outcome between the control and the incentive arms of the trial. The remaining study involved reputational incentives as the intervention (Hibbard et al., 2003). In this study, hospitals with low performance scores that were released to the public were significantly more likely to engage in quality improvement activities than hospitals with high performance scores that were released to the public.

In summary, pay-for-performance research carried out using randomized controlled trials has produced some positive results. Some of the above trials demonstrated that introducing incentives can lead to desired improvements in the quality of care delivered. However, the scope of this research is still highly

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