The cost of health care in the United States is out of control. According to the World Bank, the U.S. spends over $9,000 a year per person, which is more than two and a half times what most other developed countries pay. How can our nation find a way to rein in spending while maintaining a healthy population? One possible solution is payment innovation, with an eye toward creating better incentives.

The Problem With the Current Payment System

The United States primarily uses a system known as fee for service (FFS) for medical compensation, which means hospitals and doctors are paid for the amount of health care they deliver rather than the actual results of the care.

For example, a doctor is paid per every diagnostic test performed. Health care providers therefore have an incentive to deliver as much health care as possible, even if it’s not always helpful or necessary. This creates waste and can harm patients because unnecessary procedures might lead to problems such as an infection.

How Payment Innovation Can Help

Payment innovation looks to compensate providers for the results of their work, not the amount. This system tracks performance metrics to gauge whether providers are creating good value for their patients.

For example, a new system could look at the readmission rates of hospitals and their providers. A high readmission rate may be a sign that patients aren’t getting good care, forcing them to return quickly. This type of system pays providers more if they can lower their readmission rate.

Right now, hospitals don’t have enough motivation to reduce wasteful spending because the savings go to the insurance company. Under a value-based system, a hospital gets a bonus if it can lower its spending while also maintaining quality metrics.

Innovation in Practice

Some parts of the country have started to use payment innovation. For example, Medicare launched new data-tracking requirements so the government can better compare the results from different hospitals.

The state of California is moving toward a more value-oriented system, with 42 percent of the state’s commercial payments to health care providers now value-oriented. In comparison, only 11 percent of nationwide payments to health care providers are value-oriented. Experiments like these will show whether payment innovation has the potential for widespread success.

As the American population continues to age, managing health care costs becomes increasingly important. With a long-term goal of making the country healthier at a reasonable cost, implementing payment innovation on a large scale might be a big part of the solution.

This content is provided solely for informational purposes. It is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax and/or other professional advisers.

David Rodeck is a professional freelance writer based out of Delaware. Before writing full-time, he worked as a health- and life-insurance agent. He specializes in making insurance, investing and financial planning understandable.