Bundled Payment vs. Fee-for-Service: Impact of Payment Scheme on Performance

Management Science, 63(5), 1606-1624

56 Pages Posted: 15 Jun 2018

See all articles by Elodie Adida

Elodie Adida

University of California, Riverside - School of Business

Hamed Mamani

University of Washington - Michael G. Foster School of Business

Shima Nassiri

University of Michigan - Stephen M. Ross School of Business

Date Written: May 31, 2016

Abstract

Healthcare reimbursements in the US have been traditionally based upon a fee-for-service (FFS) scheme, providing incentives for high volume of care, rather than efficient care. The new healthcare legislation tests new payment models that remove such incentives, such as the bundled payment (BP) system. We consider a population of patients (beneficiaries). The provider may reject patients based on the patient’s cost profile, and selects the treatment intensity based on a risk-averse utility function. Treatment may result in success or failure, where failure means that unforeseen complications require further care. Our interest is in analyzing the effect of different payment schemes on outcomes such as the presence and extent of patient selection, the treatment intensity, the provider’s utility and financial risk, and the total system payoff. Our results confirm that FFS provides incentives for excessive treatment intensity and results in sub-optimal system payoff. We show that BP could lead to sub-optimal patient selection and treatment levels that may be lower or higher than desirable for the system, with a high level of financial risk for the provider. We also find that the performance of BP is extremely sensitive to the bundled payment value and to the provider’s risk aversion.

The performance of both BP and FFS degrades when the provider becomes more risk averse. We design two payment systems, hybrid payment and stop-loss mechanisms, that alleviate the shortcomings of FFS and BP and may induce system optimum decisions in a complementary manner.

Keywords: healthcare, payment models, bundled payment, fee-for-service, coordination

JEL Classification: I11, D04

Suggested Citation

Goodman, Elodie and Mamani, Hamed and Nassiri, Shima, Bundled Payment vs. Fee-for-Service: Impact of Payment Scheme on Performance (May 31, 2016). Management Science, 63(5), 1606-1624, Available at SSRN: https://ssrn.com/abstract=3187352

Elodie Goodman

University of California, Riverside - School of Business ( email )

United States

Hamed Mamani

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Shima Nassiri (Contact Author)

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
7346473308 (Phone)

HOME PAGE: http://https://sites.google.com/a/umich.edu/shima-nassiri/home

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