Risk selection and matching in performance‐based contracting

Lu, Mingshan; Albert, Ching‐to; Yuan, Lasheng

doi:10.1002/hec.734

Cited by 28 publications

(26 citation statements)

References 23 publications

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“…The empirical results in Lu et al (2003) show that PBC leads to more referrals and a better match between illness and treatment intensity, suggesting that PBC induces incentive alignment. Shen (2003) finds that PBC provides incentives for nonprofit providers of substance abuse treatment to select less severe patients into treatment.…”

Section: Literature Reviewmentioning

confidence: 96%

Impact of Performance-Based Contracting on Product Reliability: An Empirical Analysis

et al. 2012

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Using a proprietary data set provided by a major manufacturer of aircraft engines, we empirically investigate how product reliability is impacted by the use of two different types of after-sales maintenance support contracts: time and material contracts (T&MC) and performance-based contracts (PBC). We offer a number of competing arguments based on the theory of incentives that establish why product reliability may increase or decrease under PBC. We build a two-stage econometric model that explicitly accounts for the endogeneity of contract choices, and find evidence of a positive and significant effect of PBC on product reliability. The estimation of our model indicates that product reliability is higher by 25%-40% under PBC compared to under T&MC, once the endogeneity of contract choice is taken into account. Our results are consistent with two mechanisms for reliability improvement under PBC: more frequent scheduled maintenance and better care performed in each maintenance event. AbstractUsing a proprietary dataset provided by a major manufacturer of aircraft engines, we empirically investigate the impact of incentives present in after-sales repair and maintenance support contracts on product reliability. In particular, we compare the reliability of products under time and material (T&M) contracts, which have been used traditionally in the airline industry, with the reliability under performance-based contracts (PBC), which are gaining wide acceptance.We discover that there is inherent endogeneity in contract choices by the customers. To account for this endogeneity, we estimate a two-stage econometric model, and find that larger customers and users of certain equipment types are more likely to select PBC over T&M contracts. After controlling for this selection process, we find evidence for the positive and significant effect of performance incentives created by PBC on product reliability. Our estimates indicate an improvement of product reliability in the 10-25% range under PBC, compared to the reliability observed under T&M contracts. This finding is robust to numerous alternative specifications, modeling assumptions and estimation methods. Thus our research provides a valuable input into the ongoing policy debate about the effectiveness of performance contracts which are currently being introduced extensively in both the government and the private sectors.2

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Section: Literature Reviewmentioning

confidence: 96%

Impact of Performance-Based Contracting on Product Reliability: An Empirical Analysis

et al. 2012

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“…Since Fong essentially assumes an identical distribution of patient types between both providers, the scoring rule she proposes is actually inferior to the existing report cards due to the multidimensional measures in the existing ones. Another related paper is Lu et al (2003). Using a Hotelling-class model, they study the effect of performance-based contracting on the providers.…”

Section: Background and Previous Researchmentioning

confidence: 98%

Why are health care report cards so bad (good)?

Chen

2011

Journal of Health Economics

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This paper provides a signaling-game theoretical foundation for empirically testing the effects of quality report cards in the U.S. health care industry. It shows that, when health care providers face an identical distribution of patient illness severities, the multidimensional measures in the existing report cards render them a mechanism that reveals the providers' qualities without causing them to select patients. However, non-identical patient type distributions between providers, attributed to the referring physician, may force the high-quality provider to shun patients in order to signal himself. Despite this imperfection, the existing report cards cause the minimum provider selection compared with alternative report mechanisms. Since the report cards not only may cause providers to select patients, but also cause patients to select providers, the single difference-in-differences estimates used in previous studies are not sufficient to indicate providers' selection behavior. In an updated empirical framework, a treatment effect shall be estimated once every period.

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“…E. Stewart, Lareef, Hadley, & Mandell, 2017). Studies of implementation of incentive payments focused on substance use disorders have been focused on the public sector (Brucker & Stewart, 2011; Commons, McGuire, & Riordan, 1997; Lu, Albert Ma, & Yuan, 2003; Lu & Ma, 2006; Shen, 2003; M. T. Stewart, Horgan, Garnick, Ritter, & McLellan, 2013).…”

Section: Introductionmentioning

confidence: 99%

Influencing quality of outpatient SUD care: Implementation of alerts and incentives in Washington State

Garnick

Horgan

Acevedo

et al. 2017

Journal of Substance Abuse Treatment

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Financial incentives for quality improvement and feedback on specific clients are two approaches to improving the quality of treatment for individuals with substance use disorders. We examined the impacts of these interventions in Washington State by randomizing outpatient substance use treatment agencies into intervention and control groups. From October 2013 through December 2015, agencies could earn financial incentives for meeting performance goals incorporating both achievement relative to a benchmark and improvement from agencies’ own baselines. Weekly feedback was e-mailed to agencies in the alert or alert plus incentives arms. Difference-in difference regressions controlling for client and agency characteristics showed that none of the interventions significantly affected client engagement after outpatient admissions, overall or for sub-groups based on race/ethnicity, age, rural residence, or agency baseline performance. Treatment agencies offered insights related to several themes: delivery system context (e.g., agency time and resources needed during transition to a managed behavioral healthcare system), implementation (e.g., data lag), agency issues (e.g., staff turnover), and client factors (e.g., motivation). Interventions took place during a time of Medicaid expansion and planning for statewide integration of mental health and substance use disorder treatment into a managed care model, which may have resulted in agencies not responding to the interventions. Moreover, incentives and alerts at the agency-level may not be effective when factors are at play beyond the agency’s control.

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Risk selection and matching in performance‐based contracting

Cited by 28 publications

References 23 publications

Impact of Performance-Based Contracting on Product Reliability: An Empirical Analysis

Impact of Performance-Based Contracting on Product Reliability: An Empirical Analysis

Why are health care report cards so bad (good)?

Influencing quality of outpatient SUD care: Implementation of alerts and incentives in Washington State

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