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Risk selection and matching in performance-based contracting

Author

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  • Mingshan Lu

    (Department of Economics, University of Calgary, Canada)

  • Ching-to Albert Ma
  • Lasheng Yuan

    (Department of Economics, University of Calgary, Canada)

Abstract

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.

Suggested Citation

  • Mingshan Lu & Ching-to Albert Ma & Lasheng Yuan, 2003. "Risk selection and matching in performance-based contracting," Health Economics, John Wiley & Sons, Ltd., vol. 12(5), pages 339-354.
  • Handle: RePEc:wly:hlthec:v:12:y:2003:i:5:p:339-354
    DOI: 10.1002/hec.734
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    Cited by:

    1. Chen, Yijuan, 2011. "Why are health care report cards so bad (good)?," Journal of Health Economics, Elsevier, vol. 30(3), pages 575-590, May.
    2. Jose A. Guajardo & Morris A. Cohen & Sang-Hyun Kim & Serguei Netessine, 2012. "Impact of Performance-Based Contracting on Product Reliability: An Empirical Analysis," Management Science, INFORMS, vol. 58(5), pages 961-979, May.
    3. Udo Schneider, 2005. "Asymmetric Information and Outcome-based Compensation in Health Care – Theoretical Implications," HEW 0501006, EconWPA.

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