An experiment in payment reform for doctors in rural China reduced some unnecessary care but did not lower total costs.

Inefficiency and low quality of health services are common in many developing countries. To mitigate these problems, we conducted an experiment in rural China in which we changed the existing fee-for-service method of paying village doctors to a mixed payment method that included a salary plus a bonus based on performance. The new payment method also removed a feature that previously allowed doctors to purchase medications to prescribe to patients and earn a markup on each prescription. Changing these payment incentives reduced spending at the village level, curbed unnecessary care for healthier patients, and also decreased the prescribing of unnecessary drugs. However, other features of the arrangement encouraged doctors to refer sicker patients to township and county facilities, where costs were higher. As a result, total health care spending was not significantly reduced. The findings underscore that policy makers should design payment methods carefully to both contain costs and improve quality.