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Optimal Price-Setting in Pay for Performance Schemes in Health Care

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  • Søren Rud Kristensen
  • Luigi Siciliani
  • Matt Sutton

Abstract

The increased availability of process measures implies that quality of care is in some areas de facto verifiable. Optimal price-setting for verifiable quality is well-described in the incentive-design literature. We seek to narrow the large gap between actual price-setting behaviour in Pay-For-Performance schemes and the incentive literature. We present a model for setting prices for process measures of quality and show that optimal prices should reflect the marginal benefit of health gains, providers’ altruism and the opportunity cost of public funds. We derive optimal prices for processes incentivised in the Best Practice Tariffs for emergency stroke care in the English National Health Service. Based on published estimates, we compare these to the prices set by the English Department of Health. We find that actual tariffs were lower than optimal, relied on an implausibly high level of altruism, or implied a lower social value of health gains than previously used.

Suggested Citation

  • Søren Rud Kristensen & Luigi Siciliani & Matt Sutton, 2014. "Optimal Price-Setting in Pay for Performance Schemes in Health Care," Discussion Papers 14/03, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:14/03
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    References listed on IDEAS

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    Cited by:

    1. Brosig-Koch, Jeannette & Hennig-Schmidt, Heike & Kairies-Schwarz, Nadja & Wiesen, Daniel, 2016. "Physician performance pay: Evidence from a laboratory experiment," Ruhr Economic Papers 658, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    2. Domenico Lisi & Luigi Siciliani & Odd Rune Straume, 2018. "Hospital Competition under Pay-for-Performance: Quality, Mortality and Readmissions," Discussion Papers 18/03, Department of Economics, University of York.
    3. repec:wly:hlthec:v:27:y:2018:i:3:p:592-605 is not listed on IDEAS

    More about this item

    Keywords

    Pay For Performance; provider behaviour; optimal price-setting;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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