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The 8 Basic Payment Methods in Health Care8 Basic Payment Methods in Health Care

Kevin Quinn, MA
[+] Article, Author, and Disclosure Information

This article was published online first at www.annals.org on 11 August 2015.

From Xerox Corporation, Helena, Montana.

Acknowledgment: The author thanks Richard Fuller, Robert Coulam, and Candida Quinn for their kind and expert assistance during the composition of the manuscript.

Disclosures: Disclosures can be viewed at www.acponline.org/authors/icmje/ConflictOfInterestForms.do?msNum=M14-2784.

Editors' Disclosures: Christine Laine, MD, MPH, Editor in Chief, reports that she has no financial relationships or interests to disclose. Darren B. Taichman, MD, PhD, Executive Deputy Editor, reports that he has no financial relationships or interests to disclose. Cynthia D. Mulrow, MD, MSc, Senior Deputy Editor, reports that she has no relationships or interests to disclose. Deborah Cotton, MD, MPH, Deputy Editor, reports that she has no financial relationships or interest to disclose. Jaya K. Rao, MD, MHS, Deputy Editor, reports that she has stock holdings/options in Eli Lilly and Pfizer. Sankey V. Williams, MD, Deputy Editor, reports that he has no financial relationships or interests to disclose. Catharine B. Stack, PhD, MS, Deputy Editor for Statistics, reports that she has stock holdings in Pfizer.

Requests for Single Reprints: Kevin Quinn, MA, Xerox Corporation, 34 North Last Chance Gulch, Helena, MT 59601; e-mail, kevin.quinn@xerox.com.

Author Contributions: Conception and design: K. Quinn.

Drafting of the article: K. Quinn.

Critical revision of the article for important intellectual content: K. Quinn.

Final approval of the article: K. Quinn.

Ann Intern Med. 2015;163(4):300-306. doi:10.7326/M14-2784
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Eight basic payment methods are applicable across all types of health care. Each method is defined by the unit of payment (per time period, beneficiary, recipient, episode, day, service, dollar of cost, or dollar of charges). These methods are more specific than common terms, such as capitation, fee for service, global payment, and cost reimbursement. They also correspond to the division of financial risk between payer and provider, with each method reflecting a risk factor within the health care spending identity. Financial risk gradually shifts from being primarily on providers when payment is per time period to being primarily on payers when payment is per dollar of charges. Method 4 (per episode) marks the line between epidemiologic and treatment risk. The 8 methods are typically combined to balance risk and thus balance incentives between payers and providers. This taxonomy makes it easier to understand trends in payment reform—especially the shifting division of financial risk and the movement toward value-based purchasing—and types of payment reform, such as bundling, accountable care organizations, medical homes, and cost sharing. The taxonomy also enables prediction of conflicts between payers and providers. For each unit of payment, providers are rewarded for increasing units while decreasing their own cost per unit. No payment method is neutral on quality because each encourages and discourages the provision of care overall and in particular situations. Many professional norms and business practices have been established to mitigate undesirable incentives. Health care differs from many other industries in that the unit of payment remains variable and unsettled.


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Payment methods commonly used in the United States, by provider type.

HBCS = home- and community-based services; ICF/DD = intermediate care facilities for the developmentally disabled.

* Typically provided to persons requiring personal assistance and funded by Medicaid programs per 15-min service unit.

† Typically funded by Medicaid programs per day or at a percentage of cost.

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