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Risk selection and matching in performance-based contracting

  • Mingshan Lu

    (Department of Economics, University of Calgary, Canada)

  • Ching-to Albert Ma
  • Lasheng Yuan

    (Department of Economics, University of Calgary, Canada)

This paper examines selection and matching incentives of performance-based contracting (PBC) in a model of patient heterogeneity, provider horizontal differentiation and asymmetric information. Treatment effectiveness is affected by the match between a patient's illness severity and a provider's treatment intensity. Before PBC, a provider's revenue is unrelated to treatment effectiveness; therefore, providers supply treatments even if their treatment intensities do not match with the patients' severities. Under PBC, budget allocation is positively related to treatment performance; patient-provider mismatch is reduced because patients are referred more often. Using data from the state of Maine, we show that PBC leads to more referrals and better match between illness severity and treatment intensity. Moreover, we find that PBC has a positive but insignificant effect on dumping. Copyright © 2002 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/hec.734
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Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 12 (2003)
Issue (Month): 5 ()
Pages: 339-354

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Handle: RePEc:wly:hlthec:v:12:y:2003:i:5:p:339-354
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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  1. Ellis, Randall P. & McGuire, Thomas G., 1990. "Optimal payment systems for health services," Journal of Health Economics, Elsevier, vol. 9(4), pages 375-396, December.
  2. Ellis, Randall P. & McGuire, Thomas G., 1996. "Hospital response to prospective payment: Moral hazard, selection, and practice-style effects," Journal of Health Economics, Elsevier, vol. 15(3), pages 257-277, June.
  3. Allen, Robin & Gertler, Paul J, 1991. "Regulation and the Provision of Quality to Heterogenous Consumers: The Case of Prospective Pricing of Medical Services," Journal of Regulatory Economics, Springer, vol. 3(4), pages 361-75, December.
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  5. Holmstrom, Bengt R. & Tirole, Jean, 1989. "The theory of the firm," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133 Elsevier.
  6. Ma, Ching-to Albert, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 93-112, Spring.
  7. Ching-to Albert Ma & Thomas G. McGuire, 1995. "Optimal Health Insurance and Provider Payment," Papers 0059, Boston University - Industry Studies Programme.
  8. Norton, Edward C., 1992. "Incentive regulation of nursing homes," Journal of Health Economics, Elsevier, vol. 11(2), pages 105-128, August.
  9. Gaynor, Martin & Pauly, Mark V, 1990. "Compensation and Productive Efficiency of Partnerships: Evidence from Medical Group Practice," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 544-73, June.
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  12. Mingshan Lu, 1999. "Separating the True Effect from Gaming in Incentive-Based Contracts in Health Care," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(3), pages 383-431, 09.
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