HEC Research Papers Series,
HEC Paris

Abstract: To reduce preventable readmissions, many healthcare systems are transitioning from Fee-for-Service (FFS) to other reimbursement schemes such as Pay-for-Performance (P4P) or Bundled Payment (BP) so that the funder of a healthcare system can transfer to the hospital some of the financial risks associated with patient re-hospitalizations. To examine the effectiveness of different schemes (FFS, P4P, and BP), we develop a "health co-production" model in which the patient's readmissions can be "jointly controlled" by the efforts exerted by both the hospital and the patient. Our analysis of the equilibrium outcomes reveals that FFS cannot entice the hospital and the patient to exert readmission-reduction efforts. Relative to BP, we find that P4P is more "robust" in the sense that it can induce readmission-reduction efforts under milder conditions. However, BP can induce greater efforts compared to P4P. More importantly, we characterize the conditions under which BP (or P4P) is the dominant scheme from the funder's perspective. Finally, we find that patient cost-sharing can generate two benefits: (a) it provides incentive for patients to exert efforts; and (b) if not excessive, it can reduce the readmission rate.

Keywords: co-productive services; hospital readmissions; pay-for-performance; bundled payment

36 pages, September 27, 2015

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