The Theory of Value-Based Payment Incentives and Their Application to Health Care

Abstract

Objectives: To present the implications of agency theory in microeconomics, augmented by behavioral economics, for different methods of value-based payment in health care; and to derive a set of future research questions and policy recommendations based on that conceptual analysis.

Data sources: Original literature of agency theory, and secondarily behavioral economics, combined with applied research and empirical evidence on the application of those principles to value-based payment.

Study design: Conceptual analysis and targeted review of theoretical research and empirical literature relevant to value-based payment in health care.

Principal findings: Agency theory and secondarily behavioral economics have powerful implications for design of value-based payment in health care. To achieve improved value-better patient experience, clinical quality, health outcomes, and lower costs of care-high-powered incentives should directly target improved care processes, enhanced patient experience, and create achievable benchmarks for improved outcomes. Differing forms of value-based payment (e.g., shared savings and risk, reference pricing, capitation, and bundled payment), coupled with adjunct incentives for quality and efficiency, can be tailored to different market conditions and organizational settings.

Conclusions: Payment contracts that are "incentive compatible"-which directly encourage better care and reduced cost, mitigate gaming, and selectively induce clinically efficient providers to participate-will focus differentially on evidence-based care processes, will right-size and structure incentives to avoid crowd-out of providers' intrinsic motivation, and will align patient incentives with value. Future research should address the details of putting these and related principles into practice; further, by deploying these insights in payment design, policy makers will improve health care value for patients and purchasers.

Keywords: Incentives; agency theory; behavioral economics; value-based payment.

Figure 1

Principal–Agent Relationships in Health Care