Chapter 3.2 covers the way hospitals are paid. Methods for paying hospitals vary across countries and include fee-for-service, block contracts, line-item budgeting (where purchasers specify exactly what funds are used for), and activity-based funding (with a fixed rate for each episode of care independent of the hospital’s costs of care). Increasingly, pay-for-performance elements are also used. Key learning includes that

• Third-party purchasers: government agencies, social health insurance funds, or insurance companies provide the bulk of hospital revenue giving them levers to shape provision.

• Purchasers and hospitals have distinct objectives that are not always aligned — purchasers will pursue the best quality of care at the lowest price for their covered population while hospitals seek stable revenue streams to cover their costs.

• Information asymmetries give hospitals advantages over purchasers.

• Purchasers use payment methods and financial rewards to incentivize the volume and quality of care, patient-mix and management effort they want. There are complex challenges around

• – Specifying the details

• – Negotiating effective contracts, and

• – Managing payment systems.

• Monitoring outputs and safeguarding quality requires structures and systems which are costly.

• Reforming funding or transitioning from one payment model to another is often a long process that demands sophisticated design and careful implementation.