Performance-Based Contracts and Provider Efficiency: The State of the Art
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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