Hospital Competition under Pay-for-Performance: Quality, Mortality and Readmissions

Luigi Siciliani (University of York - York)

March 8, 2018, 14:00–15:15

Room MS 003

Public Economics


Health outcome indicators, such as mortality and readmission rates, are commonly used as indicators of hospital quality and as a basis to design pay-for-performance (P4P) incentive schemes. We propose a model of hospital behaviour under P4P where patients differ in severity and can choose hospital based on quality. We assume that risk-adjustment is not fully accounted for and that unobserved dimensions of severity remain. We show that the introduction of P4P which rewards lower mortality and/or readmission rates can weaken or strengthen hospitals' incentive to provide quality. Since patients with higher severity have a different probability of exercising patient choice when quality varies, this introduces a selection bias (patient composition effect) which in turn alters quality incentives. Critically, readmission rates suffer from one additional source of selection bias through mortality rates since quality affects the distribution of survived patients. This implies that the scope for counterproductive effects of P4P is larger when financial rewards are linked to readmission rates rather than mortality rates. Keywords: quality; pay-for-performance; health outcomes; performance indicators; heterogeneous severity; selection bias. JEL Classification: I12; I18. (joint with Domenico Lisi and Odd Rune Straume)