The 8 Basic Payment Methods in Health Care

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.