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The economics of incentives for value, efficiency

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This HealthAffairs blog entry looks at the economics of “paying for value.” Among the authors’ observations:

“Since payment should only rise with quality if higher payment is needed to induce better outcomes, the magnitude of the incentive payment will depend on the cost of producing higher quality. If higher quality leads to lower costs (as some believe), additional payments should not be needed because the producers of better quality can capture the cost savings. And if delivering higher quality costs more, healthcare purchasers would need to pay more, but only the amount necessary to induce the desired level of quality and certainly not in excess of what that higher quality is worth to consumers (or society).”

“{F}or organizations unlikely to generate significant savings, there is no financial incentive to invest in quality improvement. For organizations that are likely to achieve savings, the incentive to improve quality depends on the magnitude of the expected savings as well as the cost of producing higher quality. In addition, because payout of the incentive depends on actual cost savings, this incentive design increases uncertainty about the likelihood of earning the quality incentive payment and is therefore likely to reduce effort and investment in improving performance.”

“All else equal, decoupling quality incentives from incentives for efficiency would likely increase the incentives for quality-improvement activities. Yet such a decoupling would require adjustments to other program parameters (e.g. benchmark rates, shared savings percentages) to meet financial goals. Those changes will have their own incentive effects. As a result, balancing the competing goals of paying for value without paying more overall is complex. More conceptual work, experimentation, and evaluation is needed to identify effective designs.”

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