Separating the true effect from gaming in incentive-based contracts in health care

This paper studies the effect of incentive regulation on health care. In th e context of incentive-based health contracts, which might also introduce a n incentive for the providers simply to report better treatment outcomes, e valuation of treatment using the information supplied by the providers (rep orted output) could be problematic. The systematic error on the output repo rt is called providers' gaming behavior. This paper develops a general meth od for decomposing the effect of incentive-based contracts on performance i nto the true effect, which is the result of clinicians' improved effort ind uced by the contract, and the gaming effect, which is due to the change in the providers' reporting practice. The method follows the essence of linear structural relation (LISREL) models, and the true treatment output is mode led using a latent variable. Various output measures can be included in the structural evaluation model, but objective measure(s) (output measures not affected by providers' potential gaming) must be constructed based on avai lable information to identify gaming through its correlation with the repor ted measures. The strengths of this method are that information from more t han one output measure can be used, no monitoring system is required, and t he construction of a gold-standard measure is not necessary. This method is applied to evaluate the impact of Maine's performance-based contracting on its public providers' substance-abuse services. Evidence of gaming is foun d in Maine's system, which remains robust in most of the sensitivity analys es. The methodology developed here can be used to evaluate the impact of a broad range of incentive-based contracts.