Optimal Reimbursement Rule: Pay-For-Performance Versus Fee-For-Service

Résumé

This paper examines the optimal non-linear reimbursement rule of physicians under three payment methods: pay-for-performance, fee-for-service and capitation, in the presence of both adverse selection and moral hazard. I provide an argument for the criticism on the shortcomings of fee-for-service. More importantly, I also provide a rationale for the continued use of fee-for-service payment even though the serious problems with fee-for-service have been widely acknowledged. I show that fee-for-service induces substitution of total treatment quantity to physician effort. When only moral hazard problem is considered, the optimal reimbursement policy includes a pay-for-performance, a capitation without fee-for-service. By making the physician residual claimant the payer solves all the dimensions of moral hazard. However, when both adverse selection and moral hazard are considered, the optimal reimbursement policy requires a continued use of fee-for-service. Due to the fact that effort can only be indirectly contracted by the pay-for-performance, the incentive payment on the contractable treatment quantity is used as an instrument to correct unwilling distortions.