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Hospital Competition under Pay-for-Performance: Quality, Mortality and Readmissions

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

No 06/2018, NIPE Working Papers from NIPE - Universidade do Minho

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 behaviour under P4P where patients di§er 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 hospitalsíincentive to provide quality. Since patients with higher severity have a di§erent probability of exercising patient choice when quality varies, this introduces a selection bias (patient composition e§ect) which in turn alters quality incentives. We also show that this composition e§ect increases with the degree of competition. Critically, readmission rates su§er from one additional source of selection bias through mortality rates since quality a§ects the distribution of survived patients. This implies that the scope for counterproductive e§ects of P4P is larger when Önancial rewards are linked to readmission rates rather than mortality rates. We also show that our results are robust in the presence of public reporting, and discuss welfare implications.

Keywords: quality; pay-for-performance; health outcomes; performance indicators; heterogeneous severity; selection bias. (search for similar items in EconPapers)
JEL-codes: I12 I18 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-hea and nep-hrm
Date: 2018
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