Health Care Fragmentation: We Get What We Pay For

Abstract:     
Compared to other industries providing products of comparable sophistication and cost, health care delivery in the United States is extremely fragmented. This degree of fragmentation is not accidental, and it has numerous causes. Yet, the way in which health care providers are paid should be accorded prominent place - particularly when one adds in the effects of the regulatory framework necessary to administer and police the boundaries of the payment system. Our encounter-based, primarily fee-for-service payment system has a distinct tendency to reward unbundling and inefficiency. Even under the best of circumstances, the current payment system does not create systematic incentives to deliver efficient high quality care. The impact of these misaligned incentives is magnified by the civil and criminal penalties that await those foolish enough to try to rationalize (and/or) exploit these inefficiencies.

If we want to address health care fragmentation, reform of the payment system should be high on the list of priorities. Yet, attempts to reform the payment system will create numerous opportunities for those who profit from the status quo to engage in symbolic blackmail. Furthermore, it remains to be seen how much fragmentation consumers actually want; the preferences of reformers may well differ from that of consumers. Aspiring reformers should be aware of these risks and frame their efforts accordingly.

Keywords: Fragmentation, health, delivery, payment, p4p, coordination, bundled

JEL Classifications: K23, K32, I11, I18

Working Paper Series