Financial Risk in Primary Health Care Contracting: Implications for Sector Structure, Ownership and Outcomes

The success of supply-side risk-sharing contracts in achieving behavioural change amongst health care providers is dependant upon the trade-off between reduced costs from reduction in 'predictable risks' (e.g. supplier-induced demand) and increased costs from the sharing of 'random risk' optimally managed under a single large pool into several smaller risk-bearing pools. Typical capitation contracts do not distinguish between the degree of random and predictable risk shared with service providers. The strength of the financial incentives in capitation contracts must be finely balanced to ensure that elements associated with 'luck' do not lead to perverse outcomes that crowd out the achievement of the desired benefits.By examining the effects of financial risk-sharing on incentives for practitioner-owner behaviour and practice ownership this paper explores some of the likely consequences of contracts sharing over-large amounts of random risk with primary health care practitioners. Likely perverse outcomes include fewer and higher-cost consultations than under fee-for-service a systemic allocation of care quality penalising sicker-than-average populations that occurs in addition to the well-established effects of deliberate cream-skimming a bifurcation of the supply and allocation of services into a two-tier system of small privately-owned providers serving healthier-than-average populations and large nonprofit providers serving sicker-than-average populations and long-term distortions in the allocation of practitioners amongst practice ownership forms and systems of different design. The likelihood of these outcomes occurring and the costs they invoke must be carefully considered by policy-makers when designing remuneration in primary health care contracts.