Performance-based contracts and provider efficiency - The state of the art

This paper examines the form of performance-based contract which is relativ ely new to healthcare systems. Economic theories on contracting are reviewe d to provide theoretical support for potential impacts of performance-based contracting (PBC) on improving efficiency of the healthcare system. Implem entation issues of PBC in healthcare practice are briefly discussed with ex amples in the literature reviewed. In addition, various economic incentives of PBC on provider behaviour are discussed, including its primary intended incentive on improving system efficiency, as well as incentives of risk se lection on patients, improved matching between providers and patients, and gaming on reporting. In summary, with a simple and economically valid idea of 'rewarding good pe rformance' behind it, PBC is a potentially powerful contracting tool that c ould improve accountability, introduce competition, and improve the efficie ncy of healthcare resource allocation. In practice, PBC has been implemente d and tested in various settings. Some preliminary evidence suggests that t he implementation of incentive regulation such as PBC could increase health care outputs including access, quantity and effectiveness as well as reduce costs of care. However, it also introduces complicated incentives on provi ders which makes the evaluation of the effect of PBC on healthcare systems a challenging task, both theoretically and empirically. Furthermore, there are various practical issues, such as measurement of performance, which rem ain unsolved and make the implementation of PBC controversial. In the meant ime, development of PBC in healthcare systems should remain cautious. More research on outcome evaluation and treatment effectiveness is needed to est ablish the link between financial incentives and healthcare outcomes.