Those aren't the only two options. If you want to incentivize outcomes and efficiency, fee-for-outcome is an obvious option.

When it comes to medical care, you have to be really careful about how you define "outcome" if you want to use that as an incentive. You can't just use patient recovery/survival, because then you'd have doctors avoiding patients that need their care the most. You'd also continue to get extraordinary measures taken to extend the life of patients that can't survive, even when letting them go is the more humane thing to do to ease their suffering.

I've thought about this a lot, and I don't think there is any objective way to provide outcome-based incentives. The best I could think of is peer-reviewed judgements of outcomes, but that could become pretty corrupt.

For rare conditions and the very sick, there are a lot of thorny issues, and fee-for-outcome may be hard to implement well. However, those don’t represent the bulk of medical procedures; the vast majority of what’s done in a hospital is utterly routine and predictable, and the outcomes are most definitely quantifiable.

But, in those routine cases, fee-per-service-rendered is pretty much exactly the same as fee-per-outcome, no? I mean, barring malpractice, which already has its own (litigious) path of remediation.

It brings the financial incentives inline with what everyone says the goal is. Fee-for-service incentivizes volume, even if it comes with the consequence of worse outcomes; we simply depend on doctor’s morals to not push it too far, with malpractice and licensing handling truly outrageous abuses. Fee-for-outcome explicitly incentivizes better quality control in a much more fine-grained manner.

More on point, fee-for-service incentivizes unnecessary and expensive diagnostic tests. Let’s say a patient presents with an uncomplicated broken arm. If there’s a set payment for an outcome (successful treatment of the break, with fully restored function), and diagnostic and treatments costs come out of that fee, the incentive is to order as many x-rays as are necessary to successfully treat the injury and no more. In fee-for-service, the orthopedist has no incentive not to order superfluous imaging because it doesn’t cost her anything, and may have incentive to order extra imaging (if, say, she also owns the imaging center that bills for it).

Medicine is littered with examples where there are two tests whose diagnostic power is statistically equivalent, and yet doctors common write for the more expensive test. Fee-for-service is either a neutral or perverse incentive in these cases. Fee-for-outcome aligns the incentive with what society seems to want (lower-cost healthcare with good outcomes).

I fail to see how fee-for-outcome helps any of this. They would still be free to order the more expensive test, and it would even encourage more testing. If they run the wrong test and miss the diagnosis, then they don't get paid at all...

The doctor/hospital gets a flat fee for the outcome regardless of how they achieve it. Unnecessary procedures and tests come out of their bottom line.

> If you want to incentivize outcomes and efficiency, fee-for-outcome is and obvious option.

When I write a contract, there are often two prices: a minimum which is stingy and a bonus which is far from it.

The point is to say that if you do the minimum for this contract, you get a certain amount; if you excel, you get paid for that excellence.

Translated to health care, I think I'd like to see doctors doing less paperwork and more doctoring. It's not perfect, but I trust competition to pay that excellence price to those who deserve it.

That in turn means that if I need some kind of crucial care, I know where it can be found. If the system is over-regulated, that is not so.