The Economics of Health System Payment

Summary Health care takes up 10 to 15 percent of GDP in most countries. In this lecture, I consider the efficiency of the medical system, focusing on the potential for payment reform to increase efficiency. Traditionally, medical care reimbursement has been based on the quantity and intensity of the services provided. While this system encouraged valuable innovation, it failed when high quality is not achieved by increased quantity. In theory, a more efficient system could be achieved by paying for medical care on the basis of quality of care provided, not just quantity. I discuss the design of such a payment system and review the literature on how pay-for-performance systems have worked in practice. Cautious optimism about the potential for efficiency gains from payment reform is warranted. This essay was presented as the 19th Tinbergen Lecture on October 21, 2005, in Amsterdam. I am grateful to session participants for comments.