E&F - lecture 5

Question 1

What is a financial incentive?

Answer 1

• A stimulus that motivated an individual or organization to perform a specific action
• When it takes the form of a material reward (e.g., money) it is called a financial incentive

Question 2

What is a provider payment system?

Answer 2

the way in which money is allocated to providers by payers

Question 3

Relevance of payment incentives

Answer 3

• Financial incentives are always present, in any sector of the economy; everyone must be paid for their work
• Providers respond to financial incentives and can influence demand because of their information surplus
• Providers don’t always act as perfect agents for their patients

Question 4

Blended payment

Answer 4

• All payment methods have important disadvantages, especially when applied in isolation
• Makes sense to combine methods with opposing incentives
• Theory: blended payment will outperform methods in their pure form

Question 5

Agency theory

Answer 5

Provider payment entails a form of incentive contract between payer and provider. Hence, analysis is thereof falls within larger economic literature on incentive contracting, called agency theory

• Information asymmetry problematic of interests conflict, giving the agent incentives to exploit his information surplus, which may result in agency problems

Question 6

The physician’s utility function

Answer 6

• Standard theory of provider behavior: profit maximization or a favorable combination of income and leisure
• This seems not fully applicable to physicians, e.g. because they do not exploit all possibilities to induce demand
• Possible explanations:
  o Physicians pursue a target income
  o Physicians’ professional ethics

–> McGuire and Pauly’s
–> Rizzo and Zeckhauser’s

Question 7

Prospect theory:

Answer 7

people have a strong aversion. To losing relative to a subjectively determined reference/ target income
* Below TI: high marginal utility of income
* Above TI: low marginal utility of income

Question 8

Multitasking problem

Answer 8

• The design of payment incentives considerably complicated by the multitasking problem
  “Challenge of designing incentives to motivate appropriate effort across multiple tasks when the desired outcomes for some tasks are more difficult to measure than others.”

Question 9

Base payment

Answer 9

• Due to multitasking problem, provider payment must at least consist of a base part not directly linked to measured performance
• There are many different ways to structure this base payment
  o Per: service, episode, condition, person, period, …
  o Each method has its own pros and cons
• On top of the base, performance-related payments can be measured (?)

Question 10

Base payment vs. pay-for-performance

Answer 10

Base payment
* Always present
* Not directly related to measured performance
* Vast majority of revenues
* Various methods possible

Pay-for-performance
* Optional add-on
* Directly related to measured performance
* Typically small fraction of revenues
* Many design options

Question 11

o insurance/ probability risk

Answer 11

= beyond the control of the provider, therefore, should be held by the payer or insurer  you cannot predict if someone is sick or not or getting an accident or not. If something cannot be influenced, it is insurance (like air pollution)

Question 12

o performance/ technical risk

Answer 12

utilization and costs that are under the providers’ control, this risk should be held by the provider  prevention or efficient care

Question 13

payer can influence ‘location’ of the risk via the payment system:

Answer 13

• risk bearing: payer bears full risk, the provider has no incentive to act cost consciously if there are no financial consequences of their actions
• risk shifting: provider bear full risk, not desired
• risk splitting: provider bears performance risk, payer bears insurance risk. This is unlikely to be feasible in practice.
• risk sharing: provider and payer bear both risks together. Is feasible in practice

Question 14

Base payment methods and financial risk

Answer 14

à Variable, retrospective system: payer bears full risk, because provider is reimbursed for the actual input costs, no risk for the provider at all. Variations in activities induces changes in payment.
à Fixed, prospective system: provider bears full risk, because there is no link with the actual number of activities performed and also no link with the actual costs. The reimburse amount does not change as activities increase or decrease.

Question 15

Jegers et al. also make a distinction based on unit of payment:

Answer 15

o Per service (fee-for-service) or day
o Per episode or condition (episode-based or bundled payment)
o Per enrolled person (capitation payment)
o Per period (salary/ budget)

Question 16

The unit of payments signifies the intensity of the link between:

Answer 16

o Input costs and payment
 Stronger link = lower risk for provider
o Activities and payment
 Stronger link = lower risk for provider

Question 17

• Gosden et al. 2001: literature review

Answer 17

The method of payment influences physician behavior
o FFS physicians do more than capitated or salaried physicians
o Few methodologically sound studies available

Question 18

• Van Dijk et al. 2013: Dutch GP payment system

Answer 18

o < 2006: public and private insurance system
o < 2006: GPs receive capitation for public, FFS for private insured
o ≥ 2006: mix of capitation and FFS for all insured
o Increase in GP visits 5% larger in formerly publicly insured

Question 19

• Douven et al. 2015:

Answer 19

can variation in hospital treatment be explained by differences in payment method for medical specialists? (see lecture asymmetric info etc.)
o More treatments in areas with many FFS specialists than in areas with many salaried specialists
o Overall: 1% increase in number of specialists leads to treatment increase of 0.40% for FFS specialists and of 0.15% for salaried specialists

Question 20

• Gruber and Owings 1996

Answer 20

: in the face of a negative income shock, do physicians exploit their agency relation with patients by providing excessive care?
o Decline in fertility led obs/ gyns to substitute normal childbirth for more highly paid cesarean delivery

Question 21

• Chalkley and Listl 2018

Answer 21

what is the impact of dentist remuneration on the incidence of potentially harmful X-rays?
o Significant increases in X-rays when dentists receive fee-for-service rather than fixed salary