In order to create an equitable, affordable, comprehensive, high quality, universal health care system, some thought must be given to the method of provider payments. The suggestions from Physicians for a National Health Program (PNHP) seem to be the most sound, and are based upon real evidence and experience. For more details about the suggestions of PNHP’s Physicians’ Workgroup summarized below, visit the organization’s website.


We, along with most advocates in the U.S., are choosing to push for a single payer system.

A single payer system is often called Medicare for All because traditional Medicare in the U.S. has some aspects of a single payer system – there is only a single payer – though providers serve those who are covered in some other manner or are not covered at all, leading to excessive administrative costs in provider offices. Medicare is not universal – most people in the U.S. are not eligible for its benefits – so the modifier “for All” is necessary. Medicare is also not comprehensive, and has some other problems, so many advocates prefer to say National improved Medicare for All (NIMA).

PROVIDER PAYMENT METHODS In A well-designed single payer system would be:


Hospital services would be paid with a global budget for individual hospitals - not for hospital chains or hospitals within a health maintenance organization (HMO), with an operational budget separate from a capital expenditure budget. This Health Affairs article presents evidence that this payment method could save as much as 1% of total GDP – well over $100 billion per year (and well over $1.5 billion per year in Oregon) – in hospital administrative costs alone.

See also Adam Gaffney’s (PNHP president) article explaining the importance of hospital budgets.

Physicians and Outpatient Care

Payment for physicians and outpatient care would be by one of three methods:

  1. Fee-for-service (FFS): The agency and providers would negotiate a simplified, binding fee schedule.

  2. Salaries within institutions receiving global budgets: Large enough institutions could elect to be paid a global budget for the delivery of care as well as for education and prevention programs.

  3. Salaries within capitated groups: HMOs, group practices, and other institutions could elect to be paid capitation premiums to cover all outpatient, physician, and medical home care. PNHP recommends that the use of capitation should be used only if the entity receiving such payments meets specific and narrow criteria:

    1. Is nonprofit;

    2. Actually delivers care in their own facilities through salaried physicians who are employees (not contractors);

    3. Does not use their capitation or budget payments to cover hospital services (hospital services would be paid for through a global budget paid directly to the hospital); and

    4. Does not offer financial incentives based on utilization.

For more on these criteria and a discussion of the drawbacks of capitation, see below.

Pay for Performance (P4P) or Value-Based Payments (VBP)

There have been substantial efforts at both the state and federal level to move away Fee-for-service and towards Pay-for-performance and Value-based payments. In general, it does not seem wise to switch from FFS unless there is well-documented evidence that the payment method to which a switch is made has clear advantages and does not increase inequities. Most of the problems with FFS seem to be the result of appropriate services being left off the list of billable services – too often the things left out include useful and cost-effective measures such as care coordination and appropriate phone consultations.

At this time, the evidence tends to be against many of the P4P and VBP methods that have been tried. Decades of research in behavioral economics indicate that this is to be expected, since these methods tend to use extrinsic motivation to elicit behavior in situations better suited to intrinsic motivation. Stephen Kemble, a psychiatrist and PNHP activist in Hawaii, provides a very readable discussion of this in Physician Payment Options for Effective Reform. He says:


Mr. Pink [Daniel Pink in his book “Drive: The surprising Truth About What Motivates Us” - click here to listen a presentation by Pink on this] makes a compelling case that “extrinsic” motivation based on financial rewards and punishments is appropriate only for tasks that are routine, uninteresting, and require some kind of external reward in order to motivate people to do them. For complex endeavors such as health care, where the professional work force brings a high degree of “intrinsic” motivation, then extrinsic financial rewards and punishments are counterproductive and undermine intrinsic motivation, performance, and quality.

Of physician payment methods, Dr. Kemble says:

The ideal would be that physicians make patient care decisions according to what is best for each patient, with individualized care informed by knowledge of medical science and clinical experience, relying on intrinsic motivation and professional ethics that place patient welfare ahead of financial considerations. It is also appropriate for physicians to include consideration for what is best for the entire population, given that they are accountable to both the individual patient and also stewards of public resources that are not unlimited.

Every form of physician payment involves compromises from this ideal, but the compromises are not equal among different payment schemes. It is essential that we ask which payment scheme would allow physician practice to come closest to this ideal.

It is reasonable to continue research into various P4P and VBP payment methods. A great place to start would be to examine the payment methods used in countries with universal systems, since every country spends much less than we do, many have better outcomes, and all wealthy countries seem to have a more equitable health care system. P4P and VBP should not be put into widespread use until they are shown to be beneficial, and benefits need to be judged through a strong equity lens.

Why capitation should be used only in specific and narrow circumstances

Capitation is another name for a premium (paying a prior arranged amount to a risk bearing entity for the provision of an unknown quantity of healthcare that is deemed necessary during some future time interval and is “covered”), so using such a payment method either requires an insurance company or it requires an entity to act like an insurance company.

To minimize inequity, capitation requires risk adjustment. Risk adjustment is inevitably crude and complex, it tends to raise administrative costs, disagreements over its accuracy has resulted in lawsuits in Oregon, and it tends to lead to “lemon dropping” (encouraging those requiring substantial medical to leave), “cherry picking” (encouraging those who are likely to not need much care to enroll), and “upcoding” (documenting that a patient has more serious health problems than they actually have).

Experience suggests that it is unlikely that risk adjustment can make up for the inequities capitation creates, so it should be used only if the specific and narrow criteria above are met. 

See also Pros and Cons of Capitation and Bizfluent’s Advantages & Disadvantages of Capitation