Analysis of Medicare Pay-for-Performance Contracts

38 Pages Posted: 16 Sep 2016  

Hamsa Bastani

University of Pennsylvania - The Wharton School

Mohsen Bayati

Stanford Graduate School of Business

Mark Braverman

Princeton University

Ramki Gummadi

Stanford University

Ramesh Johari

Stanford University

Date Written: September 15, 2016

Abstract

Medicare has sought to improve patient care through pay-for-performance (P4P) programs that better align hospitals' financial incentives with quality of service. However, the design of these policies is subject to a variety of practical and institutional constraints, such as the use of "small" performance-based incentives. We develop a framework based on a stylized principal-agent model to characterize the optimal P4P mechanism within any set of feasible mechanisms in the regime of small incentives. Importantly, our feasible set can be flexibly modified to include institutional constraints. We apply our results to examine debated design choices in existing Medicare P4P programs, and offer several insights and policy recommendations. In particular, we find that these mechanisms may benefit by incorporating bonuses for top-performers, and using a single performance cutoff to uniformly assess performance-based payments. We also examine a number of comparative statics that shed light on when P4P mechanisms are effective.

Keywords: pay-for-performance, Medicare, mechanism design, contracts, principal-agent problem, information asymmetry, healthcare

JEL Classification: H51

Suggested Citation

Bastani, Hamsa and Bayati, Mohsen and Braverman, Mark and Gummadi, Ramki and Johari, Ramesh, Analysis of Medicare Pay-for-Performance Contracts (September 15, 2016). Available at SSRN: https://ssrn.com/abstract=2839143 or http://dx.doi.org/10.2139/ssrn.2839143

Hamsa Bastani (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Mohsen Bayati

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Mark Braverman

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

Ramki Gummadi

Stanford University ( email )

Stanford, CA 94305
United States

Ramesh Johari

Stanford University ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

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