Payment Models in US Healthcare v Other Industries

The background of health care financing in the United States and the similarities and differences with other types of businesses

The cost of health care services is higher in the US than in any other country, which cannot help affecting the whole economic situation. Health care can be paid by the government (through programs like Medicaid), private organizations (businesses paying for their employees), and by the patient out of his/her own pocket (Folland, Goodman, & Stano, 2007).

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Health care system in the US is costly: the amount of money spent on this sector has already grown more than the economy of the country can afford (17.6% of GDP), which means that the USA spends more than 8000$ per person (as compared to $1600 in the 1990s). The reasons for such high expenses are (Folland, Goodman, & Stano, 2007):

  • high costs of equipment and procedures that are commonly implemented;
  • high costs of services;
  • high administrative costs.

Thus, one of the main concerns of the government is to find ways of providing universal health care reducing its costs. Otherwise, the national debt may increase and a lot of jobs may be moved to some other countries that can provide health care at a lower price.

In some aspects, health care of the US is similar to other businesses. For instance (Folland, Goodman, & Stano, 2007):

  • like many other industries, health care requires special licenses and regulatory compliance, which means that it sets barriers for potential consumers (e.g. like the airline industry);
  • in order to receive a service or a product you should trust its providers whether he/she is a doctor, a head of a food enterprise or a lawyer;
  • you inevitably accept information asymmetry, which means that your doctor (or your mechanic) knows much more about your health (your car) than you know yourself;
  • health products and services are very complex (like, for instance, modern technologies);
  • health professionals are striving to get a good income like professionals representing any other business.

As for differences, they can be summed up as follows (Folland, Goodman, & Stano, 2007):

  • unlike other industries, health care market is not vertically integrated as it consists of a number of separate organizations that collaborate to provide the community with services and goods;
  • health care is community-oriented, which implies that health care deliverers are interested mostly in the patients belonging to one region (that cannot be applied to other businesses as they target the society as a whole);
  • health care system is strictly regulated (by various professional organizations) and politicized, which means that providers who lost their accreditation can no longer practice medicine.

Summarize different payment models leading up to current fee-for-service model.

The current fee-for-service model implies that patients must pay providers for every service they perform. This is the most wide-spread model. Its main drawback is that it gives no incentive to the provider to implement preventive measures. However, other models leading to the acceptance of this one also have their benefits and shortcomings. There is no chronological classification of models as many of them emerged simultaneously (Grol, Wensing, Eccles, & Davis, 2013):

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  • pay-for-coordination model coordinates the work of multiple providers to reduce redundancy in procedures, which, however, implies higher costs;
  • model of bundled payment encourages quality as providers are paid only for specific health care episodes;
  • partial or full capitation model provides patients with a certain amount of money for health care services based on their age, gender, race, etc.
  • global budget model implies that providers are paid a fixed sum of money annually.

Health care payment models and those from other types of businesses

If we compare health care payment models with those used in other businesses, we can conclude that some of them are universal whereas others are specific. Most businesses use (Folland, Goodman, & Stano, 2007):

  • spend-as-you-grow model, which means that the price for their goods and services increases as the company grows; this model is unacceptable for health care as it should be accessible for as many people as possible;
  • pay-for-performance model is universal for all businesses since they do not get paid unless they reach their objectives (the primary goal being customers’ satisfaction); however, in health care this model is more difficult to implement as the result depends largely on patients, not only on providers, thus “quality performance” is harder to identify;
  • fixed-fee model is an equivalent to global budget and implies receiving payment regardless of the results; like in health care, this model leads to the loss of motivation for improving quality.

Factors influencing changes from the fee-for-service model to value- and outcome-based models

The necessity for change appears when the current model fails to provide patients with high-quality care. In fact, fee-for-service model makes health delivery episodic as it is not really interested in the ultimate result. Its detachment from the holistic care is the primary factor that accounts for the transition to value-based model. The latter takes into consideration price, efficiency, and patients’ satisfaction. Thus, it is also necessitated by the economic factor: the model defines outcomes that can be achieved for each particular patient per unit of cost spent on his/her treatment. Another factor is the comprehensive nature of the approach, which means that health care services are provided until the desired result is achieved. Besides, patients want medical services to be transparent, i.e. they are willing to understand what exactly they pay for. Taken together, these factors predetermine future domination of this model in health care finance system (Porter & Teisberg, 2006).


Folland, S., Goodman, A. C., & Stano, M. (2007). The economics of health and health care. Upper Saddle River, NJ: Pearson Prentice Hall.

Grol, R., Wensing, M., Eccles, M., & Davis, D. (Eds.). (2013). Improving patient care: the implementation of change in health care. New York, NY: John Wiley & Sons.

Porter, M. E., & Teisberg, E. O. (2006). Redefining health care: creating value-based competition on results. Brighton, MA: Harvard Business Press.

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