How Does the Money Move?

The next thing to look for in health care financing is how the money moves. There are a lot of different ways a health care provider can be paid. A hospital can be paid by how many patients it sees, by the diagnosis of each of those patients, or for each individual service it provides to each patient. A physician can be paid an annual salary regardless of how much care she provides, she can be paid a flat annual sum for every patient she takes responsibility for, or she can be paid for each individual service she provides.

As a rule, paying providers, whether hospitals or individuals, for each service provided tends to lead to over-medicalization and unnecessary health care provision. Surgery and diagnostic tests in particular are over-used. Paying providers a flat salary prevents that, but removes a certain amount of profit motive from becoming a health care provider, and could conceivably decrease the supply of providers. Onehospital equivalent of a flat salary is to pay by catchment area; a hospital receives a fixed sum of money every year based on the number of patients it's responsible for. That's known as per capita reimbursement. (You can, of course, also pay the individual provider this way.) You can also pay by diagnosis. For example, a hospital or individual would be reimbursed according to how many AIDS patients it saw, how many people with pneumonia, or lung cancer, and so on. None of this is simple. Every case of pneumonia is not the same. Every patient is not the same; women, children, and the elderly require more care than men in their 20s. You need to adjust your rates to allow for this.

These different financing systems can be used in a single-payer system or a multi-payer system. It's much more complex in a multi-payer system, but it's possible. (That might be one good rule of thumb in thinking about health financing - multi-payer systems are far more complex. If you're American, you have a multi-payer system. Explains a lot, doesn't it?)