Table 1.

Main payment methods used in health systems and expected incentives

Payment method	Definition	Likely incentives when existing or analysing in isolation without considering funding flow attributes
Prospective:
Line-item budget	Providers receive a fixed amount to cover specific input expenses (e.g. staff, medicines), with limited flexibility to move funds across these budget lines	Under-provision, no focus on quality or outputs unless specified and held accountable
Global budget	Providers receive a fixed amount of funds for a certain period to cover aggregate expenditures. The budget is flexible and is not tied to line items.	Under-provision, also in terms of quality or outputs unless specified and held accountable; more potential for efficiency due to budget flexibility
Capitation	Providers are paid a fixed amount in advance to provide a defined set of services for each person enrolled for a fixed period of time.	Under-provision, over-referral (if unit of payment does not include some referral services)
Retrospective:
Fee-for-service	Providers are paid for each individual service provided. Fees are fixed in advance for each service or group of services.	Increased provision, or over-provision
Case-based (or diagnosis related groups)	Hospitals are paid a fixed amount per admission depending on patient and clinical characteristics.	Increase of volume, reduction of costs per case, avoidance of severe cases
Per diem	Hospitals are paid a fixed amount per day so that an admitted patient is treated in the hospital.	Extended length of stay, reduced cost per day; cream-skimming

Source: Adapted from Cashin (2015).