Physicians' incentives, patients' characteristics, and quality of care: a systematic experimental comparison of performance-pay systems

Abstract

How performance pay affects physicians' medical service provision and the quality of care is relevant for researchers and policy-makers alike. This paper systematically studies how performance pay, complementing either fee-for-service or capitation, affects physicians' medical service provision and the quality of care for heterogeneous patients. Using a series of controlled behavioral experiments with physicians and students, we test the incentive effect of performance pay at a within-subject level. We consider a performance pay scheme which grants a discrete bonus if a quality threshold is reached, which varies with the patients' severity of illness. We find that performance pay significantly reduces non-optimal service provision and enhances the quality of care. Effect sizes depend on the patients' severity of illness and whether performance pay is blended with fee-for-service or capitation. Health policy implications, including a cost benefit analysis of introducing performance pay, are discussed.

Keywords: Capitation; Fee-for-service; Heterogeneous patients; Laboratory experiment; Pay for performance; Treatment quality.

Fig. 1

Mean quantity by patients’ health characteristics. Notes. This figure shows the mean quantity with 95% confidence interval under the four payment systems for each of the nine patients kl. Patients vary by their illness $k=A,B,C$ and severity of illnesses l with mild (x), intermediate (y), and high (z) severities of illnesses

Fig. 2

Reduction in the absolute deviation from optimal care by payment system and severity of illness. Notes. This figure shows the reduction in $\rho$ achieved by performance pay, differentiated by FFS and CAP conditions and severities of illness