OPTIMAL BLENDED PHYSICIAN PAYMENT STRUCTURES

Purpose: Policy makers and members of the healthcare industry are developing new payment structures to reduce health care costs. However, these changes to payment structure are not supported by economic theory or empirical research (Banabou and Tirole 2003, Ballou 1999, Holmstrom and Migrom 1991, Baker 1992) and furthermore, the changes are made without a thorough understanding of the downstream impact on physician behavior. The purpose of this paper is to simulate the outcomes of novel blended physician payment structures in order to gain understanding of how incentives influence physician behavior. In particular, this study will test novel payment structures’ efficacy at improving quality of care while minimizing cost.

 

Methods: To measure the impact of blended payment structures on physician behavior, I have performed counterfactual simulations with data collected in my 2011 laboratory experiment (Green 2011, SMDM Lee Lusted Award). In my previous study, I tested the effect of the Capitation, FFS, Salary, FFS with Report Cards, and Capitation with Report Cards payment structures on physician behavior. However, no studies have examined a combination of these payment structures, which could potentially elucidate critical relationships between physician behavior and patient care.

In the current study, I predict changes in physician behavior caused by blends of the abovementioned payment structures. To determine the optimal blended payment structure, I located the maximum health care provider’s utility, which is a function of both the patients’ benefits and the provider’s profit from physicians’ behavior. Physician behavior is determined by the blended payment structure through the use of counterfactual simulations.

 

Results: The counterfactual simulations showed that a blend of the Flat Rate and Piece Rate payment mechanisms represented the optimal combination of payment structures.

 

Conclusions: While FFS and Capitation payment structure on their own have serious flaws, i.e. encouraging overtreatment by FFS and under-treatment by Capitation, their combined advantages provide an efficient payment mechanism in terms of employer profit and the overall outcome of a physician-patient relationship.