Working Papers

Coordinating Contracts in Value-Based Healthcare Delivery: Integration and Dynamic Incentives

Tannaz Mahootchi, Ignacio Castillo, Logan McLeod

We study a value-based healthcare delivery system with two non-cooperative parties: a purchaser of medical services and an Integrated Practice Unit (IPU). The IPU is capable of providing all healthcare needs of patients with a specific medical condition (homogeneous patient population), is comprised of a multi-disciplinary team of providers, and is responsible for the health outcomes of the patients over the care cycle. The IPU chooses the treatment strategy, incurs the associated cost, and is paid by the healthcare purchaser. The treatment strategy critically determines the health outcomes of the patients. Assuming the existence of universal health insurance for the patient population, the healthcare purchaser’s problem is to determine a payment scheme that will induce social welfare maximizing choices to the IPU. We use a dynamic continuous-time principal-agent model to capture the relationship between the purchaser and the IPU, and determine the optimal payment scheme, referred to as dynamic outcome-adjusted payment. The model characterizes the optimal payment scheme with a single variable. Previous value-based healthcare delivery principles suggest that the IPU should be reimbursed according to a “bundled payment.” Our results suggest payment should depend on the history of health outcomes over the care cycle. The proposed payment scheme combines a bundled payment with a bonus payment for consistently producing superior outcomes. Our results suggest value could be improved by paying for health outcomes over the care cycle; thus supporting the value-based healthcare delivery objective of achieving healthier patients over time. Unlike other performance-based payment schemes, this scheme could result in a single-variable implementation.

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Paper Keywords

value-based healthcare delivery, integrated healthcare delivery, universal health insurance, payment systems, coordinating contracts, dynamic incentives