Quality-based payment in health care: Theory and practice

Quality-based payment in healthcare---also known as pay-for-performance---is a popular policy intervention aimed at improving healthcare quality. However, there has been little theoretical work characterizing the underlying quality problem or the interaction between pay-for-performance and existing payment mechanisms. Furthermore, there is little empirical evidence that pay-for-performance has a substantial effect on healthcare quality.;In chapter 1, I develop a model of provider competition on two dimensions of quality and show that the efficient pay-for-performance contract corrects a market failure by rewarding dimensions of quality that are under-supplied in the existing system. I argue that provider allocation of effort to various tasks is inefficient without pay-for-performance, a multitasking problem that can be mitigated by an optimally designed pay-for-performance contract.;In 2004, U.K. National Health Service implemented the Quality and Outcomes Framework (QOF), a new contract that rewarded primary care practices based on a wide range of quality measures. In chapters 2 and 3, I use electronic medical record data from 357 practices to analyze how practices responded to the QOF.;Chapter 2 analyzes practice performance on quality of care for coronary heart disease, diabetes, and chronic kidney disease. I find that over the first two to three years of the QOF, overall quality of care improved in each domain, with improvements in both care processes and intermediate outcomes.;Chapter 3 investigates the specificity with which practices responded to the new incentives under QOF, focusing on the following thresholds: (1) performance ceilings above which practices do not receive additional payment, (2) test score thresholds that define success or failure on a quality indicator, and (3) end-of-fiscal-year effects introduced by annual reporting of results. I find discrete differences in provider behavior around each of these thresholds.;This dissertation makes three major contributions to the literature on quality-based payment, showing the following: (1) the design of quality-based payment contracts should consider interactions with the existing payment system; (2) a new quality-based payment contract in the United Kingdom was associated with improved quality of care; and (3) GP practices responded to specific marginal incentives, implying that quality-based payment should align incentives with desired provider responses.