July–August 2016
Article
Harvard Business Review

How to Pay for Health Care

By: Michael E. Porter and Robert S. Kaplan

Format:Print

Abstract

The United States stands at a crossroads in how to pay for health care. Fee for service, the dominant model in the United States and many other countries, is now widely recognized as perhaps the biggest obstacle to improving health care delivery. A battle is currently raging, outside of the public eye, between the advocates of two radically different payment approaches: capitation and bundled payments. The stakes are high, and the outcome will define the shape of the health care system for many years to come, for better or for worse. In this article, the authors argue that although capitation may deliver modest savings in the short run, it brings significant risks and will fail to fundamentally change the trajectory of a broken system. The bundled payment model, in contrast, triggers competition between providers to create value where it matters—at the individual patient level—and puts health care on the right path. The authors provide robust proof-of-concept examples of bundled payment initiatives in the United States and abroad, address the challenges of transitioning to bundled payments, and respond to critics' concerns about obstacles to implementation.