An output approach to incentive reimbursement for hospitals.

A method of incentive reimbursement for health care institutions is described that is designed to stimulate the providers' efficiency. The two main features are: (1) reimbursement based on a weighted average of actual cost and mean cost plus or minus an appropriate number of standard deviations; (2) output defined as episodes of illness given adequate treatment instead of days of hospitalization. It is suggested that despite the operational difficulties involved in a method of payment based on an output approach, the flexibility incorporated into the determination of reimbursement by use of the properties of a normal frequency distribution would make the system workable.