Healthcare Payment Models — Implications for the GCC

How to pay your doctor whether it be for a visit or a complicated surgery is a fundamental question and a defining element of every health care system. At the core lies the fact that it is difficult to standardize the service provided — the difficulty is from an input (i.e., resources required) and output (i.e., quality of service delivered). Questions like is a doctor visit for a simple fever the same as a visit for a vaccination? Are all heart surgeries the same? Furthermore, the relatively unorganized nature of the provider industry adds to the mix — with independent doctors, multi-physician specialties, large hospitals, and hospital chains all being part of the mix. For the longest time, the issue of healthcare payments did not get the appropriate level of scrutiny by policymakers but the recent increases in healthcare expenses around the world have forced policymakers to examine this aspect in detail. The realization that cost and quality are linked in more ways than one in the healthcare context has also intensified the need. Payment systems can provide the incentives for quality, service and cost –containment. In developed economies like the US where the issue of healthcare expenses is acute — stakeholders are experimenting with various models to compensate providers. This article explores the evolution of payment models, lessons learned from the recent P4P experiments in the US and in the light of the above two potential action steps which the GCC countries could undertake to ensure that a progressive results-oriented payment model is embedded at this early stage in the market place. Finally, payment system has two elements — how to determine the price of services and how to make the payment once the price had been determined (processing of the claims/ bills and the actual payment). There are inefficiencies and innovations in both aspects but the focus of the article is the former (how to determine the price).


The current momentum around payment reform follows several key changes in provider payment systems over the last 20–25 years. Over that time payments have evolved from a FFS (Fee For Service) where the provider was paid for services, to various DRG based systems where the provider was paid based on input parameters –i.e., the resources utilized or the type of the case and finally to the current experiments in P4P where providers are paid based on outcomes.

The original FFS systems induced increased activity and complexity in the system. It leads to overuse and distortion in the system. Providers had an incentive to perform more of high margin services irrespective of medical necessity. It also leads to numerous disagreements between insurers and providers on the suitability of prices. Finally, the incentives in such a system for promoting quality, service, and cost-containment were missing. Providers leveraged their ability to influence the patient’s usage of services — both by type and quantity. For example, the Caesarean delivery rate in Korea jumped from 6% in 1985 to 43% in 1999 more than four times the level recommended by WHO — spurred by a fee which resulted in a margin of 2.7 times greater than that for normal delivery([1]).

Apart from FFS systems, two other payment systems took hold — namely the Capitation system and the DRG (Diagnosis Related Group) system. The significant growth of managed care brought about the capitation systems. In line with the broader HMO philosophy of seeing the PCP at the center of the healthcare system, the capitation system was designed to pay the hospital/ physician on a per capita basis. The system shifted the risk to the providers. Providers were paid a fixed fee and had to manage the patient load within that fixed fee. It was thought that this would incentivize the providers to ensure that the patient was healthy as that would minimize the healthcare costs. However this system resulted in low quality of care with physicians providing limited services, it also led to physicians referring the patient to specialists and hospitals resulting in transferring costs to higher cost situations. Finally, it also led to providers rejecting high-risk patients.

The other payment system DRG (Diagnosis-related group) is a system to classify hospital cases into one of approximately 500 groups, also referred to as DRGs, expected to have similar hospital resource use, developed for Medicare as part of the prospective payment system in 1983. The system was developed at Yale University and was first legislated in 1987 in the state of New York and has been in use since. Since the DRG system paid on a case basis it spurred providers to discharge patients faster[2], monitoring of costs, undertreatment, and selection of patients. For example, the length of hospital stays reduced by 15% in the first three years after the introduction of DRGs. Regulators and insurers have introduced modifications to take into account the negative aspects of DRG systems like combining it with a global budget. Additionally, several variations of DRG were also introduced, intended to expand the scope of the methodology and DRGs continue to be the dominant form of payment in employment-based systems like the US.


One element of the various payment systems above was the inability to measure and reward providers for superior quality and service. That provided the impetus for P4P (Pay for Performance) systems which are designed to reward superior performance. The underlying assumption is that high quality also equates to lower costs, especially in the long run. This sets P4P systems apart from earlier input or output based systems — users will pay for outcomes and quality. The idea is to add a performance-based financial incentive to provider payment, to reward better quality performance and to prevent negative consequences such as inappropriate referrals to hospitals and specialists and substandard quality of care.

P4P is still largely in an experimental stage in the US. There are numerous (estimates vary between 50 to 150) employer and insurer sponsored pilots for P4P. The pilots involve setting up quality measures both broader measures and specific procedure-related measures and implementing both bonuses and withholds based on the hospital’s performance. The targets are set based on comparative ranking or absolute/ threshold scores or on a change over earlier ratings. P4P experiments are typically not budget neutral and involve an additional infusion of funds to support the programs. In parallel there also a broader movement by regulators, insurers, and employers to share hospital quality and price data with consumers.

The initial response of P4P has been mixed. However, most have not measured results scientifically; only 6 of the 17 programs reviewed by IOM demonstrated “methodological strength” while a Rand study released recently found “no studies demonstrating the relationship between P4P and improved performance in the hospital setting, controlling for other factors”[3]. Evidence of cost-saving from P4P is weak — evolution in metrics and financial incentives are needed for success. There is significant skepticism that any measurement system could account for the complexities in healthcare. However, given the additional funding involved and potential to make performance-based bonuses providers are interested and participating in experiments. While the P4P programs are still evolving and various scenarios have been laid out regarding future states, the programs have gained momentum and all stakeholders are eagerly watching the developments. For now, CMS (Centers for Medicare and Medicaid Services) has put its weight behind the program and chosen to expand the scope of its P4P program which is a significant movement in the right direction.


Based on the above there various clear implications for GCC countries as they transition to mandatory health insurance systems which will require a clearly defined provider payment system. Given that an effective and stable P4P system has yet to be developed — the most likely choice for a payment system in GCC is the DRG system. Key potential action points emerge for GCC countries:

Build a plan to develop a DRG system. This will involve developing case the basic DRG system (i.e., case group criteria, weights, base rates), developing the attendant information systems and billing systems. Apart from the core DRG system, the governments will need to ensure that there exist appropriate information and financial management resources in the healthcare system to support DRG implementation, ensure the enabling legal and institutional settings that support the effectiveness of payment system, and define contracts between payors and providers (as the government is likely to be the largest payor and provider in these countries).

Governments in these countries would be well served by closely following P4P trends and adopting those aspects of P4P which have proven validity and effectiveness. One of the elements which could be rolled out immediately could be a focus on transparency. Governments could develop a plan to share price and quality data with consumers at least for those procedures and services where the quality measures are unambiguous. Additionally, a provider body that helps develop, and achieve consensus regarding quality measures would be a move in the right direction.

Last but not least developing an efficient physical payment system could a long way in saving precious healthcare resources. To that end, an electronic claim, billing and payment systems can significantly help reduce transaction costs.


[1] “Payment system reform for health care providers in Korea” Soonman Kwon Department of Health Policy and Management, School of Public Health, Seoul National University, Korea

[2] “Case-Based Hospital Payment Systems: A Step-by-Step Guide for Design and Implementation in Low- and Middle-Income Countries.” Cashin, C., Samyshkin, Y, O’Dougherty, S. et al

[3] Galvin, Robert. “Pay-for-Performance and Medicare: Moving from the Drawing Board to the Doctor’s Office,” Transcript from The Alliance for Health Reform and the Commonwealth Fund, December 15, 2006: “Rewarding Provider Behavior,” Institute of Medicine Pathways to Quality Healthcare Series, Appendix B



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