Financial incentive to health care providers is crucial to health carecost and the performance of health care industry. Fee-for-service payment to providers is one of root causes of inefficiency in health care delivery, such as ever-increasing quantity and intensity of care and the distortion in the mix of medical care in patient treatment. DRG(Diagnosis Related Group)-based prospective payment system is more incentive-compatible than cost-based reimbursement (e.g., fee-for-service), and will provide strong incentives for physicians to minimize health care cost. Reimbursement policy for pharmaceuticals such as reference pricing and the positive listing based on cost effectiveness is important for the containment of pharmaceutical expenditure and the increased role of generics relative to expensive brand-name drugs.

Health care delivery is very inefficient and fragmented in Korea because there is no division between physician clinics and hospitals, primary care physicians and specialists, and acute care hospitals and long-term care institutions. Networking or vertically integrated system of care among physician clinics, hospitals and long-term care institutions will increase efficiency in health care industry and improve treatment outcomes by better coordinating care. Mandatory participation of health care providers in social health insurance system can lead to a potential abuse of bargaining power of the insurer as a monopsonist. Since Korea now has a sufficient supply of health care providers, allowing providers to opt out of (social) health insurance system will not have a serious negative effect on the access to medical care for consumers.

Since (social) health insurance has a universal coverage of population, health care delivery is closely related to health insurance system as the single payer. In spite of health insurance, private payment (e.g., out-of-pocket) accounts for nearly 40% of health care expenditure, resulting in limited security for catastrophic medical expense and inequity in payment for health care. Expansion of the benefit coverage and the restructuring of the benefits, such as increasing out-of-pocket payment (OOP) for minor cases and decreasing OOP for major/catastrophic cases, are called for. Private health insurance needs to be complementary by providing coverage for medical care that is not coveredby social health insurance. Private insurance needs to take the form of managed care and inject competition by selectively contracting with providers with high performance.

Regulatory reform faces many challenges because of path dependency of institutions and ideological conflicts as well as vested interests of various stakeholders. Strategic implementation or sequencing rather than comprehensive reform will be a better policy.