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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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    Cited by:

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    2. Emma McManus & Jack Elliott & Rachel Meacock & Paul Wilson & Judith Gellatly & Matt Sutton, 2021. "The effects of structure, process and outcome incentives on primary care referrals to a national prevention programme," Health Economics, John Wiley & Sons, Ltd., vol. 30(6), pages 1393-1416, June.
    3. Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2018. "A dynamic model of quality competition with endogenous prices," Journal of Economic Dynamics and Control, Elsevier, vol. 94(C), pages 190-206.
    4. Galina Besstremyannaya & Sergei Golovan, 2019. "Physician’s altruism in incentive contracts: Medicare’s quality race," CINCH Working Paper Series 1903, Universitaet Duisburg-Essen, Competent in Competition and Health.
    5. 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.
    6. Domenico Lisi & Luigi Siciliani & Odd Rune Straume, 2020. "Hospital competition under pay‐for‐performance: Quality, mortality, and readmissions," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(2), pages 289-314, April.
    7. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2023. "Dynamic, incentive-compatible contracting for health services," Working Papers 2023.16, Fondazione Eni Enrico Mattei.
    8. Brosig-Koch, Jeannette & Groß, Mona & Hennig-Schmidt, Heike & Kairies-Schwarz, Nadja & Wiesen, Daniel, 2021. "Physicians' incentives, patients' characteristics, and quality of care: A systematic experimental comparison of fee-for-service, capitation, and pay for performance," Ruhr Economic Papers 923, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    9. Frank G. Sandmann & Julie V. Robotham & Sarah R. Deeny & W. John Edmunds & Mark Jit, 2018. "Estimating the opportunity costs of bed‐days," Health Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 592-605, March.
    10. Brosig-Koch, Jeannette & Hennig-Schmidt, Heike & Kairies-Schwarz, Nadja & Kokot, Johanna & Wiesen, Daniel, 2020. "Physician performance pay: Experimental evidence," HERO Online Working Paper Series 2020:3, University of Oslo, Health Economics Research Programme.
    11. Feng, Yan & Kristensen, Søren Rud & Lorgelly, Paula & Meacock, Rachel & Sanchez, Marina Rodes & Siciliani, Luigi & Sutton, Matt, 2019. "Pay for performance for specialised care in England: Strengths and weaknesses," Health Policy, Elsevier, vol. 123(11), pages 1036-1041.
    12. Luigi Siciliani & James Gaughan & Nils Gutacker & Hugh Gravelle & Martin Chalkley, 2021. "Paying for health gains," Working Papers 183cherp, Centre for Health Economics, University of York.

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    More about this item

    Keywords

    Pay For Performance; provider behaviour; optimal price-setting;
    All these keywords.

    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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