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Hospital competition under pay‐for‐performance: Quality, mortality, and readmissions

Domenico Lisi (), Luigi Siciliani () and Odd Rune Straume ()

Journal of Economics & Management Strategy, 2020, vol. 29, issue 2, 289-314

Abstract: Health outcomes, such as mortality and readmission rates, are commonly used as indicators of hospital quality and as a basis to design pay‐for‐performance (P4P) incentive schemes. We propose a model of hospital behavior under P4P where patients differ in severity and can choose hospital based on quality. We assume that risk‐adjustment is not fully accounted for and that unobserved dimensions of severity remain. We show that the introduction of P4P which rewards lower mortality and/or readmission rates can weaken or strengthen hospitals' incentive to provide quality. Since patients with higher severity have a different probability of exercising patient choice when quality varies, this introduces a selection bias (patient composition effect) which in turn alters quality incentives. We also show that this composition effect increases with the degree of competition. Critically, readmission rates suffer from one additional source of selection bias through mortality rates since quality affects the distribution of survived patients. This implies that the scope for counterproductive effects of P4P is larger when financial rewards are linked to readmission rates rather than mortality rates.

Date: 2020
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https://doi.org/10.1111/jems.12345

Related works:
Working Paper: Hospital Competition under Pay-for-Performance: Quality, Mortality and Readmissions (2018) Downloads
Working Paper: Hospital Competition under Pay-for-Performance: Quality, Mortality and Readmissions (2018) Downloads
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