Fee for service – largely restricted to the private self-pay market, this approach involves billing each element within an episode of care separately (each test, procedure, bed day is a separate and billable cost event)

• No incentive to skimp on volume or quality of care
• Incentivises provider to increase access, capacity and patient choice
• Drives detailed data collection

• Can lead to over-provision and ‘gold plating’
• Little incentive for cost control
• Costly to administer

Case based – a standard price is defined for an episode of care based on a classification of the patient and the type of care they required (healthcare resource group [HRG] and diagnosis related group [DRG] systems). Used in the UK (payment by results), as well as Australia, USA and a number of European systems

• Incentive to reduce unit cost of care – e.g. reduced length of stay, use of consumables
• Incentivises provider to increase access and capacity
• Impact on quality of care less clear – in theory may incentivise higher quality to attract more patients

• Does not encourage demand management (i.e. there is risk of oversupply) nor a focus on improved population health
• Impact on quality less clear – in theory may lead to ‘skimping’ as costs driven down

Block contracts – payments to providers that cover running costs and are not sensitive (or only indirectly sensitive) to volumes of care

• Encourages cost containment both in terms of the unit cost of each element of care and the volume of care
• Simple to implement with low transaction costs
• Greater certainty of funding for providers

• May encourage skimping on quality and volume of care
• Does not encourage ease of access to care for patients
• May incentivise providers to push patients across care boundaries

Capitation – a global payment per patient that is risk adjusted to cover many or all of that individual’s health services

• Encourages cost containment both in terms of the unit cost of each element of care and the volume of care
• Encourages allocative efficiency [1] and population health management (assuming this is less costly than downstream treatment)

• Can create monopolistic power (limit competition) and limit patient choice
• Can result in skimping and capacity constriction

Quality incentive contracts (‘pay for performance’) – payments to providers for meeting predetermined quality indicators. Usually a top-up/overlay to another payment approach or an additional contract

• Can encourage effective clinical practice and higher quality for patients
• May offset perverse incentives of other approaches

• Can lead to a process-oriented view of care, as process adherence is often easier to measure than true outcomes
• Can encourage a focus on only a restricted number of quality domains to the exclusion of others (the ‘streetlamp’ effect)

Risk and gain sharing –Organisational or individual payments are increased if financial targets are met for the wider system – e.g. in the US, health maintenance organisations’ (HMOs) payment being linked to containing costs for an insurer. Usually a top-up or overlay to another payment approach.

• Incentivises cost containment and allocative efficiency

• Can lead to skimping
• Can be complex to administer – e.g. when involving contracts with a large number of individual physicians and small surgeries