Rewarding organizations for providing good care to a patient over the course of an illness or over time is the most difficult challenge. The current system typically pays hospitals on a per-case, per-diem, or charge basis; individual physicians on a fee-for-service basis; and integrated health care delivery systems on a capitation basis. Under those terms, hospitals may be penalized if they reduce hospitalization rates or shorten hospital stays, and physicians may be penalized if they keep chronic conditions well controlled. Only integrated health care delivery systems are rewarded for efficiency gains, but they are not rewarded for achieving higher quality.

One step might be to create a new type of group practice, perhaps called "accountable physician practices," that would be responsible for meeting quality and efficiency targets. Payment could be made through a blended system of fixed monthly fees for enrolled patients, fee-for-service (with rates adjusted to reflect additional revenue from other bases of payment), and bonuses for high performance. For hospitals, payment could be based on diagnosis—the method currently used by Medicare—with bonuses for meeting quality targets.

All providers could be required to report information on quality and efficiency for the patients under their care. In a mixed public-private system of insurance, this could be facilitated through a new multi-payer claims data system, which could also serve as an information base on provider performance.

Payment differentials among insurers should be eliminated or greatly narrowed. Currently, for example, Medicaid tends to pay at a much lower rate than other sources of insurance, and Medicare typically pays less than commercial insurers. It might also be helpful to establish levels of covered benefits, with the first level composed of "high-value" benefits, such as preventive care and management of chronic conditions; a second level of "effective" benefits, such as treatment of acute conditions; and a third level of "patient-preference or supply-sensitive" benefits, which involve greater discretion.⁽²⁸⁾ Patient cost-sharing could vary across the three levels of benefits: no cost for high-value benefits, modest or minimal cost-sharing for effective benefits, and standard cost-sharing for patient-preference or supply-sensitive benefits. Classification should be scientifically driven, and benefits found not to improve health outcomes or patient quality of life should not be covered

The diversity of the health care system brings with it the advantages of innovation and choice. Disadvantages include high administrative costs, complexity and confusion among options, burdensome reporting requirements, and delays and uncertainties regarding payment. The proliferation of options also reflects the wide range of health plan strategies to enroll the most "profitable" enrollees and discourage the enrollment of sicker patients. Since 10 percent of patients account for 70 percent of health care outlays, insurers have tremendous incentives to employ market segmentation techniques to achieve favorable selection. This is particularly a problem in the individual and small group markets, but it can also occur when multiple insurers are offered by an employer.

To simplify the health system, dominant players may have to give up their preferential treatment. Today, for example, large employers receive better insurance benefits than small businesses for the same premium, hospitals with larger market shares negotiate higher payment rates than smaller hospitals, and Medicare and Medicaid pay less than commercial insurers do. Standardizing practice in five areas—payment methods, benefits, claims administration, provider credentialing, and quality standards—would preserve innovation and choice while improving efficiency, effectiveness, and equity.