Distorted Payment System Undermines Business Case for Health Quality and Efficiency Gains

Originally published by the Center for Studying Health System Change (HSC), 2007.

Distorted Payment System Undermines the Business Case for Quality

The prevailing health care payment system was actively undermining the business case for investments in quality and efficiency, according to HSC research. Under fee-for-service payment, providers generated more revenue by delivering more services, regardless of whether those services improved patient outcomes. This created a perverse financial incentive where reducing unnecessary care, preventing complications, and improving efficiency actually decreased provider revenue.

Hospitals that invested in reducing surgical complications, for example, lost the revenue they would have earned from treating those complications. Physician practices that invested in care coordination to prevent emergency department visits and hospitalizations saw their efforts benefit payers and patients but not their own bottom lines. The research documented how this misalignment between financial incentives and quality goals created a fundamental barrier to health system improvement that could not be overcome without reforming how providers are paid. Payment models that rewarded value rather than volume, such as bundled payments, shared savings arrangements, and capitation, offered potential solutions but faced their own implementation challenges.

Sources and Further Reading

Center for Studying Health System Change, "Distorted Payment System Undermines Business Case for Health Quality and Efficiency Gains" (2007).