How to Incentivize Higher Quality and Lower Cost in U.S. Medical Care

The U.S. health system is the only place where you can buy a $7,000 MRI, receive it in a room that looks like a spaceship,
and still walk out wondering, “Wait… was that covered?” We don’t have a “too many doctors” problem or a “too little
technology” problem. We have an incentives problem.

Right now, too much of U.S. medical care gets paid like a buffet: the more you put on your plate, the more money changes hands.
Meanwhile, the people paying the bill (patients, employers, taxpayers) aren’t always the ones choosing what’s ordered, where it’s
delivered, or whether it was even necessary. When the system rewards volume, complexity, and market power, it shouldn’t shock
anyone that we end up with… volume, complexity, and market power.

The good news: incentives can be redesigned. And when they are, you can get the rare unicorn of American policy debates
better quality and lower cost at the same time. This guide breaks down what works, what tends to backfire,
and how to build a health care “deal” where everyone wins (yes, even your blood pressure).

Why Costs Stay High Even When Everyone Says They Want “Value”

1) Fee-for-service pays for doing, not for results

In traditional fee-for-service, clinicians and hospitals are paid per visit, test, procedure, or admission. That’s great if your goal is
to maximize the number of things done. It’s not great if your goal is to prevent complications, coordinate care, avoid unnecessary
imaging, or keep people healthy enough to stay out of the hospital.

2) The “same” service can cost wildly different amounts depending on where it happens

In many markets, a scan in a hospital outpatient department can cost far more than the identical scan in a freestanding imaging
center. The patient often can’t tell the difference until the bill arrives (surprise!). This pricing gap creates incentives for care to migrate
into higher-priced settings, sometimes driven by health system acquisitions and “facility fees.”

3) Administrative complexity is a hidden tax on the entire system

Billing rules, prior authorization, multiple payer requirements, inconsistent quality reporting, and endless forms can turn
a clinical day into a paperwork triathlon. A system that requires a small army to push claims through the pipes will predictably
spend a lot on… the army.

4) Market power beats market discipline

When a hospital system owns most of the local hospitals and a big slice of physician practices, negotiations with insurers are less
“competitive marketplace” and more “please don’t take away the only hospital in town.” Consolidation can also shift services into
higher-cost settings and raise commercial pricesespecially when patients don’t have realistic alternatives.

The North Star: Pay for Health Outcomes per Dollar, Not Just Health Care Units

Incentives improve when three things happen together:

• Accountability for outcomes that matter (survival, function, symptom control, patient experience, safety).
• Accountability for total cost (not just the cost of one visit or one hospital stay).
• Transparency about prices and performance so patients, employers, and payers can make smarter choices.

The trick is designing incentives that reduce waste without encouraging “stinting” (doing too little) or gaming (making numbers look good while care stays the same).
Think of it like training a dog: reward the behavior you want, but don’t accidentally teach it to knock over the trash can to get treats faster.

1) Scale Value-Based Payment Models That Share Savings (and Risk)

Accountable Care Organizations (ACOs): pay for total-cost performance and quality

ACO-style contracts aim to reward clinicians for lowering total spending for a population while meeting quality benchmarks. Instead of
earning more by ordering more, the organization can earn more by preventing avoidable hospitalizations, improving chronic disease control,
and coordinating care better.

One of the clearest signals that incentives matter is that large-scale ACO programs have produced measurable savings alongside quality
performance. For example, Medicare’s Shared Savings Program has reported substantial recent savings relative to benchmarks and widespread
participation earning performance payments, while also tracking improvements in measures like blood pressure control and diabetes markers.

Global budgets and capitation: pay for keeping people well, with guardrails

In capitation or global budget approaches, providers receive a per-person payment to cover care over a period of time. Done well, this creates
strong incentives to invest in primary care, proactive outreach, and better transitions after hospitalizations.

Done poorly, it can create incentives to under-serve. The “done well” version has guardrails: robust quality measures, access standards, patient
experience monitoring, and risk adjustment so providers aren’t punished for serving sicker or more complex patients.

2) Use Bundled Payments to Reward Efficient, High-Quality Episodes of Care

Bundled payment models set a target price for an episodesay a hip replacement that includes surgery, post-acute care, and follow-up. Providers
can share in savings if total costs come in under the target while meeting quality measures.

Bundles can work particularly well when:

• The episode is common and definable (joint replacements, certain cardiac procedures).
• Outcomes are measurable (complications, readmissions, function, patient-reported outcomes).
• Post-acute care variation is a major cost driver (skilled nursing vs home health decisions).

The best bundles don’t just squeeze prices. They redesign care: pre-surgical optimization, infection prevention, standardized pathways,
and earlier mobilizationso patients recover faster and avoid costly complications.

3) Fix Site-of-Service Incentives with Site-Neutral Payments

If the same service can be safely delivered in multiple settings, paying dramatically different rates based on ownership or location is an invitation
to move care into the highest-paid site. Site-neutral payment reforms aim to close that gap so the system doesn’t overpay for routine services
just because they happen under a hospital’s billing umbrella.

Site-neutral reforms can:

• Lower Medicare spending and patient cost-sharing for selected outpatient services.
• Reduce incentives for hospitals to acquire physician practices primarily to bill higher rates.
• Encourage appropriate migration of care to ambulatory surgery centers and offices when clinically safe.

There are real tradeoffs: hospitals argue that outpatient margins support emergency departments, teaching, and complex care. The practical solution
is to apply site-neutrality selectively (services that are truly comparable across sites), while pairing it with targeted support for
essential safety-net functionsso we don’t “save money” by destabilizing access.

4) Make Quality Measurement Smarter, More Meaningful, and Less Gameable

You can’t incentivize quality if “quality” is defined as “did someone click the checkbox.” The future is:

• Outcome measures (complications, mortality, functional status).
• Patient-reported outcomes (pain, mobility, symptom burden).
• Equity-aware measures that track gaps by race, income, geography, and disability status.
• Digital quality measures that reduce manual chart abstraction and make reporting less painful.

Also: keep the measure set small and high-impact. A thousand measures can create a thousand ways to waste time.
A focused set can change behavior.

5) Reduce Administrative Waste with Interoperability, Standardization, and Prior Authorization Reform

Administrative overhead is expensiveand it crowds out care

Administrative spending in the U.S. is widely recognized as unusually high, driven by billing complexity, insurance administration, and
the “financial transactions ecosystem” that sits between patients and care. If you want lower costs without rationing care, this is one of the
least controversial places to start.

Modernize prior authorization so it targets low-value care without punishing everyone

Prior authorization can reduce unnecessary utilization, but it can also delay care, frustrate clinicians, and generate massive overhead.
The best incentive design is:

• Automate the easy stuff (real-time approvals for standard scenarios).
• Focus on outliers (unusually high utilization patterns) rather than blanket friction.
• Make it electronic and interoperable so it doesn’t require fax machines and “press 4 for despair.”

Recent federal policy has pushed payers toward interoperable APIs and electronic prior authorization workflows, aiming to reduce burden and
improve data exchange between payers and providers. When done right, this turns prior authorization from a manual obstacle course into a
largely automated safety check.

6) Use Price Transparency and Benefit Design to Create Real Consumer (and Employer) Leverage

Transparency alone doesn’t fix pricesposting a thousand-page machine-readable file doesn’t help a patient choosing where to get an MRI next week.
But transparency combined with incentives can change purchasing.

What works:

• Shoppable services: imaging, labs, outpatient procedures, certain surgeries.
• Reference pricing: the employer/plan pays up to a set amount; patients pay extra if they choose higher-priced sites.
• Shared-savings steering: patients share in savings when they choose high-value providers.
• Centers of excellence for high-cost, high-variation procedures (with travel support).

Enforcement matters, too. Transparency rules that aren’t enforced become “strongly worded suggestions.” Recent federal enforcement activity has
increasingly focused on hospital price transparency compliance and usabilitybecause the whole point is for prices to be findable, comparable,
and credible.

7) Strengthen Competition Policy to Counter Consolidation-Driven Price Increases

In markets dominated by a few systems, “incentivize” can start to sound like “beg.” That’s why competition policy is a cost strategy.
The most practical approaches include:

• Stronger scrutiny of hospital and physician practice acquisitions, including serial “small” deals that add up.
• Site-neutral payment reforms that reduce the financial payoff from acquisitions designed to capture facility fees.
• Network and contracting reforms that discourage anti-competitive clauses and improve patient choice.

Evidence reviews have linked certain forms of consolidation to higher prices and spending, often through shifting services to higher-cost settings and
increasing bargaining leverage. Incentives can’t work if the market can’t say “no.”

8) Invest Upstream: Primary Care, Chronic Disease, and Patient Safety Pay Off

Pay more for primary care that prevents expensive downstream events

Strong primary care reduces avoidable emergency visits and admissions by managing chronic disease, medication adherence, behavioral health,
and preventive care. But primary care often gets paid the least in a system that pays the most for procedures. Value-based models can reverse that:
invest in the front door of the system so fewer people crash through the (very expensive) back door.

Safety is qualityand it’s also cost control

Hospital-acquired infections, adverse drug events, pressure injuries, and surgical complications are both devastating and expensive. National patient
safety efforts have shown that reducing hospital-acquired conditions can save lives and billions of dollarsmaking safety one of the most human
(and financially rational) incentive targets available.

9) Address Drug Costs: Negotiation, Biosimilars, and Smarter Coverage

Drugsespecially specialty drugs and biologicsare major cost drivers. There’s no single lever, but a few are especially powerful:

• Medicare drug price negotiation for selected high-spend drugs, with negotiated prices phased in on a defined timeline.
• Biosimilars to create competition for biologic drugs, paired with policies that reduce unnecessary development barriers and improve adoption.
• Formulary design that rewards high-value therapies and discourages low-value or duplicative prescribing.

The policy goal isn’t “cheap drugs at any cost.” It’s affordable access with strong incentives for meaningful innovation, and faster competitive entry when
patents expire.

A Practical Playbook: Who Can Do What (Without Waiting for a Perfect World)

Policymakers

• Expand and refine value-based payment models with strong quality guardrails.
• Implement targeted site-neutral payments while protecting essential safety-net services.
• Modernize and standardize administrative workflows (claims, eligibility, prior auth, quality reporting).
• Fund competition oversight and improve merger transparency, including serial acquisitions.
• Accelerate biosimilar and generic competition while enforcing anticompetitive behavior rules.

Employers and plan sponsors

• Use transparency data to build high-value networks and reference pricing for shoppable services.
• Offer incentives that are simple: “If you go to Provider A, your cost is lower.”
• Support centers of excellence for high-variation procedures with travel and navigation help.

Health plans

• Move from “deny and defend” utilization management to targeted, automated, clinician-friendly approaches.
• Share timely data with providers via interoperable standards to support care coordination.
• Align incentives across pharmacy and medical benefits so savings in one bucket don’t raise costs in another.

Providers and health systems

• Invest in care management, transitions, and preventive outreachespecially for high-risk patients.
• Standardize high-volume episodes (bundles) to reduce complications and post-acute variation.
• Adopt safety programs aggressivelyharm reduction is a quality strategy and a cost strategy.
• Make “digital quality” real: automate reporting and use the data to improve care, not just to report it.

Watch Outs: How Incentives Can Backfire (and How to Prevent It)

• Stinting risk: Pair spending accountability with strong access, outcomes, and patient experience measures.
• Cherry-picking risk: Use robust risk adjustment and monitor outcomes for underserved populations.
• Measurement overload: Use fewer, higher-impact metrics; automate data capture where possible.
• Rural and safety-net fragility: Combine payment reforms with targeted supports for essential access points.
• Gaming: Audit, validate, and use multi-source measures (claims + clinical + patient-reported outcomes).

Real-World Experiences: What Incentive Design Looks Like on the Ground (and Why It Matters)

The policy language“benchmarks,” “risk adjustment,” “FHIR APIs”can feel abstract. But incentives show up in ordinary moments.
Below are composite, real-world-style scenarios drawn from commonly reported experiences of patients, clinicians, employers, and administrators.
They’re not about any single person; they’re about how the system behaves when you change what it rewards.

Experience #1: The patient who just wants a price that’s real

A patient needs a non-urgent MRI. In the old world, they call three places and get three versions of “we’ll bill your insurance and see.”
They schedule blindly, then months later receive an explanation of benefits that reads like a ransom note. In a transparency-plus-incentives world,
the plan’s tool shows estimated out-of-pocket costs at multiple sites, and the benefit design makes the choice matter: the lower-cost
imaging center comes with a lower copay. Suddenly, the patient isn’t “shopping for health care” like it’s a toasterthey’re making a
reasonable, guided choice for a shoppable service, with real numbers.

Experience #2: The primary care clinic that finally gets paid to prevent problems

A small primary care practice signs a value-based contract. Instead of chasing visit volume, they hire a nurse care manager and a behavioral
health counselor. The clinic starts doing outreach: medication checks after hospital discharges, home blood pressure monitoring, and weekly
touchpoints for patients with uncontrolled diabetes. It doesn’t look dramaticno TV medical montage, no slow-motion running down a hallway.
But three months later, fewer patients land in the ER for preventable flare-ups. The clinic shares in savings because they invested in
boring, consistent prevention. The incentive is the difference between “We wish we could do that” and “We can afford to do that.”

Experience #3: The hospital team that discovers complications are not just tragicthey’re expensive

A hospital participating in a bundled payment for joint replacement notices that readmissions and surgical site infections are driving their
costs above target. They overhaul pre-op optimization: smoking cessation support, anemia management, tighter glucose control, standardized
antibiotic timing, and a post-discharge follow-up call within 48 hours. The changes improve patient recovery and reduce complications.
In fee-for-service, fewer complications can mean less revenue. Under a bundle, fewer complications can mean better margins and
better outcomes. The incentive turns safety work from “nice to have” into “how we stay afloat.”

Experience #4: The employer who learns “network” isn’t a strategy unless it’s designed

A benefits manager at a mid-sized company sees year-after-year premium increases. They move beyond a generic broad network and use claims
analytics to identify high-variation services: imaging, colonoscopies, certain outpatient surgeries. They implement reference pricing, negotiate a
center-of-excellence option for high-cost surgeries, and provide navigation support so employees aren’t left wandering the system alone.
Employees still get to choose, but now the plan’s incentives are aligned with value. Over time, utilization shifts toward high-quality, lower-cost
sitesand the employer can slow cost growth without cutting benefits.

Experience #5: Prior authorization stops being a fax-based endurance sport

A specialist’s office used to dedicate hours each week to prior auth: phone calls, faxes, repeated documentation requests, and delays that made
patients feel like they were stuck in administrative purgatory. With interoperable electronic workflows, routine requests can be auto-approved
when documentation meets criteria, and denials come with clearer reasons and quicker turnaround. Clinicians spend less time on paperwork,
patients wait less, and utilization management becomes more targeted. The incentive shift is subtle but powerful: it rewards systems that reduce
friction while still guarding against low-value care.

In each scenario, the pattern is the same: when incentives reward outcomes, coordination, safety, and smart purchasing, the system starts behaving
more like a health system and less like a billing system with stethoscopes.

Conclusion: Better Incentives Are the Most Practical “Reform” We Have

Incentivizing higher quality and lower cost in U.S. medical care isn’t about one silver bullet. It’s about stacking practical changes that reinforce
one another: value-based payment that rewards outcomes, site-neutrality that stops overpaying for location, administrative simplification that
reduces waste, transparency that enables smarter purchasing, competition policy that limits price leverage, patient safety that prevents harm, and
drug policies that expand competition while supporting innovation.

If you remember one thing, make it this: the system will do what the system pays for. Pay for volume and complexity, and you’ll get more of both.
Pay for outcomes per dollar, and you’ll get more healthat a price that’s closer to sane.