3. How Service Providers Are Paid Matters as Much as How Much They Are Paid _<mark>Deon Filmer and Adam Wagstaff</mark>_ Service providers, such as schoolteachers or health workers, must be paid. How they are paid shapes their incentives to provide high‐quality services as much – if not more than – how much they are paid. Service providers around the world typically are paid in one of three ways, each of which is problematic:<sup>24</sup>

- **According to the specific services they provide (fee‐for‐service** ). This approach is quite common in health. This approach incentivizes the provision of services, and if the payer can observe quality, it may also encourage the provision of quality services. But it also incentivizes the provision of unnecessary services in environments where it is hard for the payer to establish whether the marginal service is necessary. Fee‐for‐service also encourages providers to “upcode” – to pretend the service was more complex than it really was.

- **According to the number and characteristics of the people they serve (capitation).** A school could get a fixed amount per enrolled pupil. A primary health care provider could get a fixed amount per person on their list. These amounts could vary according to the demographics of the population served, with schools getting more generous capitation payments for older or poorer children and primary health care providers getting more generous payments for seniors and women. A hospital could get paid a specific amount for each patient with a specific diagnosis or for each patient in a specific diagnosis group.  However, capitation encourages providers to list more people as being served, but disincentivizes delivering services to them – since providers get the capitation payment anyway. It also discourages providers from taking on hard‐to‐serve groups, e.g. very old people or students with learning difficulties, and to skimp on quality.

- **According to their own characteristics (budget‐and‐salary).** A doctor or a teacher could get a salary, linked perhaps to their seniority; a hospital could get a budget linked perhaps to the number of beds it has or the number of operating rooms; a school could get a budget based on the number of classrooms it has. But salaries and budgets fail to reward effort, and often, as one commentator<sup>25</sup> puts it, “condone on‐the‐job leisure”.

Unsurprisingly, sticking with the same payment method and simply making it more generous is not the answer. A study of public‐sector health providers in India<sup>26</sup> found that the size of the provider’s salary made no difference to the quality of their performance. This is consistent with an experiment in Indonesia<sup>27</sup> where teachers’ salaries were doubled with no impact on student learning.

> 24 Robinson JC. Theory and Practice in the Design of Physician Payment Incentives. _Milbank Quarterly_ 2001; 79(2): 149.

> 25 Das J, Holla A, Mohpal A, and Muralidharan K. Quality and Accountability in Health Care Delivery: Audit‐Study Evidence from Primary Care in India. _American Economic Review_ 2016; 106(12): 3765‐99.

> 26 Das J, Holla A, Mohpal A, and Muralidharan K. Quality and Accountability in Health Care Delivery: Audit‐Study Evidence from Primary Care in India. _American Economic Review_ 2016; 106(12): 3765‐99.

> 27 De Ree J, Muralidharan K, Pradhan M, and Rogers H. Double or Nothing? Experimental Evidence on an

> Unconditional Teacher Salary Increase in Indonesia. _Quarterly Journal of Economics_ 2018; 133(2): 993‐1039.

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