Unbiased Analysis of Today's Healthcare Issues

Which value-based payment system is best?

Written By: Jason Shafrin - Nov• 22•15

Clearly, there is no single answer to this question and the answer depends on a number of factors including the market structure, provider responsiveness to intrinsic vs. extrinsic motivation, provider sample size, and the ability to accurately measure quality of care.  Douglas Conrad (2015) uses agency theory to provide an overview of existing value-based payment systems.  The article is a wonderful overview and has a number of useful insights.  For instance, Conrad describes why stable payment arrangements and quality measures are most useful for changing provider behavior:

Microeconomics has established that long-run price elasticities of supply and demand are both greater in absolute value than the respective short-run elasticities. In the short run, certain resources are fixed (e.g., capital inputs) and this dampens supply response to demand price…The Alternative Quality Contract in Massachusetts constitutes a successful example of this principle because of its 5-year duration, the fixity of its global payment method, and the predictable evolution of level of PMPM payment over time (Chernew et al. 2001; Song et al. 2012, 2014). In contrast, payers unexpectedly lowering PMPM payments or unexpectedly raising performance thresholds in future periods, seeking to capture an increased share of savings, will find that they might have shot themselves in the foot.” Short run surprises are likely to discourage future provider participation and to lower provider efficiency incentives. Similar consequences arise from Medicare accountable care organization (ACO) arrangements that inadvertently punish high-performing providers by rewarding improvement in, but not the level of, performance.

For those interested in value-based payment structures, this is a very interesting read.

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