Why U.S. Health Care Has So Many Payment Methodologies

One of the most difficult and complicated decisions that U.S. health care organizations and practitioners face is what payment methodologies to adopt. There are various, often incompatible, models from which to choose, and competing incentives that pull you, as the decision-maker, in different directions. In the thick of the decision-making process, frustration can lead you to sit back and wonder why there are so many methodologies in the first place.

The accurate but incomplete answer is that years of evolving considerations among legislators, regulators, and industry leaders led to contractual arrangements that, along with statutes and their attendant regulations, underlie the various payment models. This merely describes the effect.

The cause of this effect is the unique nature of the healthcare marketplace. This may seem obvious, but it is nevertheless worth keeping in mind. Though there are many more, I mention five ways in which the health care market is unique.

First, there are only a few circumstances when a patient is in a position to “shop around” by performing a like-for-like comparison of potential providers. Setting aside the oft-debated dearth of data about pricing, rating the quality of medical care in a way that is easily digestible for the lay public (e.g., a five-star system) invariably leads to the oversimplification of a complex set of criteria.

Second, apart from the limited circumstances when telehealth is permitted, most goods and services must be delivered in-person. This shrinks the market for most goods and services to the radius of a reasonable drive.

Third, the “consumer” in this market is rarely the person deciding what and from whom to purchase; that choice instead falls primarily on the clinician. Notwithstanding pharmaceutical advertisements and the rise of WebMD and its ilk, the individual who chooses the goods and services and the individual who receives the goods and services are rarely the same.

Fourth, the recipient of the goods and services frequently shares the price with a payer. Though this plays a limited role in any market where insurance exists (e.g., car body shops and home repair contractors), it plays an omnipresent role in health care.

Fifth, the costs of that payer are frequently subsidized by employers, if not by public funds. This means that while the patient and a payer are often paying for the goods and services, the patient and an employer are often paying the payer. The various (often conflicting) interests of these parties create a dynamic different from that between a typical buyer and seller.

So when you and your organization are deciding what payment methodologies make the most sense in light of patient population, risk tolerance, payer mix, and other factors, remember that this challenging issue arises from the unique nature of the market for health care goods and services. Understanding this fundamental point can help build a helpful context around the decision-making process.