Wielding the Carrot and the Stick: How to Move the U.S. Health Care System Away from Fee-for-Service Payment

The U.S. health system is plagued by fragmented care, variable quality, and high and rapidly growing costs. Underlying these problems is the prevalence of fee-for-service payment, in which health care providers are paid per visit, test, or procedure. Not only does fee-for-service payment fail to provide incentives for efficiency, quality, or outcomes, it encourages the provision of unnecessary care and often discourages coordination of care and management of patients across providers and settings.

A broad range of policy experts have called for the adoption of alternative approaches to paying for health care. But how do we move our $2.9 trillion health system from fee-for-service payment to other approaches?

Three elements are key to successfully moving toward alternative payment approaches:

• The carrot—Implement policies that reward high performance and encourage changes in the organization and delivery of health care.
• The stick—Reduce and eventually eliminate the option of remaining in the fee-for-service payment system. 
• The muscle—Coordinate policies across public programs and private payers so they are applied consistently and their impact is maximized.

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