In nearly all industries, payments for services or products reflect short-term performance or long-term value. Yet in health care, most payments to health providers have done neither. Instead, they have often simply rewarded greater volume of services whether needed or not. Recently, attention has moved away from rewarding volume of health care to quality and efficiency. Changing epidemiology and care models for an ageing population, managing of patients with complex health needs and scarce resources, all make it imperative to change how we pay for health services.

How health care providers are paid is one of the key policy levers that countries have to drive health system performance. However, health providers are still paid in traditional ways – through fee-for-service (FFS), capitation, salary, global budgets or more recently diagnosis-related groups (DRGs). These give incentives for undesirable behaviours, for instance over-provision of services or inattention to clinical needs. More should be done to align payer and provider incentives so that payment is based on delivering value to patients.

Most often, health care providers are paid in the same way they always have been, using the traditional, dominant payment methods common across OECD health systems. Yet, these ways of paying providers – through fee-for-service (FFS), capitation, salary, global budget or more recently diagnosis-related groups (DRG) – are often poorly aligned with contemporary health system priorities. Rather than giving incentives to providers to improve quality, or deliver care more efficiently, “traditional” payment methods come with built-in incentives leading to undesirable behaviours, for instance over-provision of services or inattention to clinical need.

This chapter presents an overview of the predominant payment systems used in OECD countries to pay health care providers, notably in primary care, outpatient specialist care and hospital settings. These payment methods include fee-for-service (FFS), capitation, global budgets and salary and more recently, payment per case/diagnosis related groups in the hospital setting. Each payment method generates incentives, likely to affect provider behaviour and the predominant payment systems do not always provide the right incentives and tend to encourage volume of services and increases in health spending. These “traditional” ways of paying providers are often not well adapted to contemporary health system challenges, for instance the need to increase co-ordination of care, or provide high quality care for chronic diseases. While some OECD countries have begun to reform their traditional payments, others have introduced payment innovations that are more closely tied to key health system objectives of efficiency and quality of care.

This chapter explores the implementation of additional payments for health care providers, tied to particular objectives or requirements. Specifically, it looks at how additional payments have been introduced to incentivise or facilitate co-ordination, and how they have been used to encourage improvement in performance, also known as “pay for performance” or P4P. The chapter follows a standardised analytical framework to explore policies in select OECD countries, notably the ENMR programme from France, cardiovascular disease care in Germany, the introduction of Family Health Units in Portugal, the diversification of payment methods for primary care practitioners in Ontario, Canada, and the introduction of a performance-based component to hospital budgets in Norway. Best practice and lessons for other OECD countries are highlighted, focussing on the extent to which these forms of innovative payment can be said to contribute to cost savings and quality improvement, as well as other health policy objectives.

“Bundled” payments for health care, where several services relevant to a condition or intervention are grouped together for payment, are being used in several OECD countries. Bundled payments go beyond DRG payments, and aim to encourage cost savings and quality improvements for acute episodes of care such as elective surgical interventions and care for chronic conditions such as diabetes.

This chapter discusses population-based payment to pay groups of health providers – referred to as Accountable Care Organisations (ACOs) in the United States and elsewhere. ACOs are financially accountable for the provision of all or the vast majority of health care services to a defined population. They are permitted to keep part of the savings they generate provided they meet specific quality criteria.