Redesigning Hospital Financing Systems: Insights from Principal-Agent and Contract Theory

Public health authorities in many countries struggle with rising health care expenditures. With progress in medical science and technology and with ageing populations, health care expenditure growth will not automatically slow down. Hence public health authorities develop incentives, for patients and health care providers, to contain expenditure growth. We show how insights from agency and information asymmetries have fertilized the development of new hospital payment systems. We show how prospective payment systems were introduced to control hospital care costs and are still being fine-tuned, to prevent quality and access problems. More recently, pay-for-performance payment (P4P) systems are introduced to reshift the pendulum toward quality improvement (rather than only cost containment).