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This chapter discusses whether and how payment policy can be an effective tool for improving health care delivery and whether past and present payment reforms will lead to better and more affordable health care. Focusing on Medicare, the chapter sketches out the theoretical framework that health economists use to examine provider payment and summarizes the empirical tests of this theory. It then summarizes the evolution of Medicare from cost-based to prospective reimbursement and its entry into value-based purchasing and assesses whether payment policy is making progress. The chapter concludes that on the whole, efforts to transform health care by mobilizing or redirecting competition through consumers are problematic owing to the limits of patient expertise and hidden information and actions by providers. Finally, addressing the question of whether it is possible to get payment “right,” the chapter concludes that as long as payment for physician services is based on a fee schedule and each provider is in its own silo, cost control will remain extremely difficult.

The Rethink Health Dynamics Model represents the complex dynamics of a regional health system in the United States and has been calibrated for more than 10 regions using nationwide and local data. When testing single interventions, the simulated improvement in system performance is often less than desired. By experimenting with combinations of interventions, the authors have identified recurring reasons for underperformance or intervention pitfalls. Here they discuss four common pitfalls and possible ways to overcome each with additional intervention. The pitfalls include (a) trying to cut costs without changing payment incentives; (b) depleting available funds without securing sustainable financing; (c) trying to achieve greater equity through service delivery without building capacity to meet greater demand; and (d) missing the opportunity to achieve multiple goals simultaneously through the use of mutually supporting interventions. The chapter illustrates each pitfall and proposed solution with causal feedback diagrams and simulation output graphs.

Changing how addiction treatment is paid for is critical to improving the quality of these services and increasing patient access to more effective care. Currently, several aspects of the payment system for substance use disorder treatment services perpetuate outdated care models through perverse incentives that hinder adoption of best practices—for example, fee-for-service payments that incentivize high-intensity acute treatment episodes rather than chronic disease management. These payment practices are undergoing scrutiny and many changes have already begun to transform treatment policies. Recognizing a turning point for the engagement of third-party payers and an impetus for progressive payment reform, Shatterproof, a national nonprofit organization, partnered with health insurers to advance the substance use disorder treatment system in the United States and developed eight principles of care. This chapter describes this work and changes to payment models to better support patient needs, community and public health, and the interests of private insurers and health care providers.