Choosing Outcomes-Based Reimbursement Policies: Should We Worry About Collusion? (Revision 3 )

Outcomes-based reimbursement rewards health providers with better health outcomes with higher payments. The design of such reimbursement systems involves several choices, including the type of contract (e.g., capitation or fee-for-service), which measure (e.g., population- or provider-level outcomes), and whether to contract with individual providers or groups of providers. The authors explore which outcomes-based reimbursement may be vulnerable to potentially illegal collusion, and whether collusion issues can be averted through incentive design. They present a parsimonious game-theoretic model of care for chronic patients on a care pathway in a two-tier healthcare system. We identify differences in the impact of collusion on health, costs, and system efficiency under different reimbursement policies. Theoretical and numerical results (calibrated to data from two pathways for diabetes) show that whether an outcomes-adjusted reimbursement system is vulnerable to collusion depends critically on one trait: whether the income of physicians who receive referrals scales with volume. In systems where it does, as with some fee-for-service models in the US, there exist financial incentives to collude, underlining the importance of addressing collusion through laws. Systems that lack this trait (e.g., the UK NHS) are more resistant to collusion. In exploring the theoretically optimal contracts, the authors find evidence of strong performance of outcomes-adjusted capitation contracts with individual providers using population-level data.