Contracting for health services when patient demand does not reflect quality

Abstract

This paper analyses contracts to keep down costs while maintaining quality of health services when patient demand does not reflect quality. There is then a natural role for forms of contract that have emerged during the reforms of the NHS in Britain that differ from pure fixed price or cost reimbursement contracts. The optimal form depends on whether the provider is entirely self-interested or benevolent in having genuine concern for patient welfare. With fully benevolent providers there are roles for block and cost and volume contracts. With partially benevolent providers, some degree of cost sharing is typically optimal.