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Health system financing models and provider payment methods
Every health system answers three questions – where the money comes from (taxes, social insurance, private insurance, direct payment), how risk is pooled, and how providers are paid – and the provider payment method creates predictable incentives about the volume of services and the length of stay.
Why it matters in the exam
Items on this topic ask which model describes a certain country: the Beveridge model – financing from general taxes and a public service (United Kingdom); the Bismarck model – social insurance funded by workers and employers (Germany); a government single-payer national insurance (Canada); and systems with a large share of private insurance (United States). Other items test incentives: fee for service encourages more services, capitation encourages fewer services and cream skimming, per-diem payment lengthens stays, and payment by diagnosis (DRG) or a price per admission encourages shorter stays. Also tested are market failures in health: asymmetric information, moral hazard (overuse when a service is free), adverse selection (sick people insure themselves more) and supplier-induced demand. A typical item describes a study of household out-of-pocket spending and asks why direct payment is considered regressive – it weighs more heavily on poor households and can lead to catastrophic spending. Co-payments reduce overuse, but also necessary use, especially among the poor and the chronically ill.
Key points
- The Beveridge model is tax-funded; the Bismarck model is funded by social insurance.
- Fee for service encourages overuse; capitation encourages undertreatment and cream skimming.
- Payment by diagnosis or price per admission shortens stays.
- Market failures: asymmetric information, moral hazard, adverse selection and induced demand.
- Out-of-pocket payment is regressive and can cause catastrophic spending.
Summary table
| Provider payment method | Incentive | Main risk | Example |
|---|---|---|---|
| Fee for service | Provide more services | Overuse and high costs | Independent physician |
| Capitation | Keep the member healthy and save | Undertreatment and cream skimming | Payment to health funds and family doctors |
| Per diem | Lengthen stays | Admissions longer than needed | A daily rate for a ward |
| By diagnosis (DRG) or price per admission | Shorten stays and become efficient | Discharge too early and "upcoding" | A fixed payment for an operation |
| Global budget | Stay within the budget | Queues and waiting lists | An annual hospital budget |
| Salary | Unlinked to volume | Low productivity | A salaried hospital physician |
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Sources
- WHO, The World Health Report – Health systems financing: the path to universal coverage, 2010 — Raising resources; Pooling; Purchasing
- Folland, Goodman & Stano, The Economics of Health and Health Care, 8th ed., 2017 — Health insurance; Asymmetric information
- OECD, Health at a Glance, 2023 — Health expenditure and financing
Sources are given for further reading; the text is written afresh and not copied from them.
Reviewed by the Examqo AI Professor · 2026-11-06. The text may contain errors; when in doubt, check the source.