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Performance-Based Contracts and Provider Efficiency

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Disease Management and Health Outcomes

Abstract

This paper examines the form of performance-based contract which is relatively new to healthcare systems. Economic theories on contracting are reviewed to provide theoretical support for potential impacts of performance-based contracting (PBC) on improving efficiency of the healthcare system. Implementation issues of PBC in healthcare practice are briefly discussed with examples in the literature reviewed. In addition, various economic incentives of PBC on provider behaviour are discussed, including its primary intended incentive on improving system efficiency, as well as incentives of risk selection on patients, improved matching between providers and patients, and gaming on reporting.

In summary, with a simple and economically valid idea of ‘rewarding good performance’ behind it, PBC is a potentially powerful contracting tool that could improve accountability, introduce competition, and improve the efficiency of healthcare resource allocation. In practice, PBC has been implemented and tested in various settings. Some preliminary evidence suggests that the implementation of incentive regulation such as PBC could increase healthcare outputs including access, quantity and effectiveness as well as reduce costs of care. However, it also introduces complicated incentives on providers which makes the evaluation of the effect of PBC on healthcare systems a challenging task, both theoretically and empirically. Furthermore, there are various practical issues, such as measurement of performance, which remain unsolved and make the implementation of PBC controversial. In the meantime, development of PBC in healthcare systems should remain cautious. More research on outcome evaluation and treatment effectiveness is needed to establish the link between financial incentives and healthcare outcomes.

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Notes

  1. Due to the nature of the healthcare system, it is difficult for the principal to precisely monitor, and therefore contract on ‘outputs’. This further complicates the contracting in healthcare. However, the central concern in both standard contracting theory and healthcare contracting remains the same, which is how to motivate the agent to perform as the principal would prefer, taking into account the principal’s difficulties in monitoring the agent (either on the agent’s effort or output). Therefore, the results from the standard optimal contracting theory still have important implications for healthcare contracting.

  2. Issues related to PBC have also been studied in other nonhealthcare public sector literature. For example, see Baker et al.[36] for a review of the empirical evidence on incentives provided by different executive compensation schemes in corporations.

  3. There is, however, no explicit formulas defining level of funding as a function of the performance level. Nor is it described in the contracts what procedures the Maine government will use to evaluate performance results.

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Acknowledgements

Financial support from the Institute of Health Economics and Alberta Heritage Foundation is gratefully acknowledged. We thank Leigh-Ann Topfer for providing excellent assistance on literature search. The views expressed here are the authors’ alone.

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  1. Department of Economics, University of Calgary, Building/Room: Social Sciences 440, 2500 University Drive N.W., Calgary, Alberta, Canada, T2N 1N4

    Mingshan Lu (Assistant Professor) & Cam Donaldson (Svare Chair of Health Economics)

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  1. Mingshan Lu
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  2. Cam Donaldson
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Correspondence to Mingshan Lu.

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Lu, M., Donaldson, C. Performance-Based Contracts and Provider Efficiency. Dis-Manage-Health-Outcomes 7, 127–137 (2000). https://doi.org/10.2165/00115677-200007030-00002

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