Provider Altruism in Incentives Contracts: Medicare’s Quality Race

Abstract

The paper analyzes the impact of provider altruism and motivation on the out ­comes of pay-for-performance reimbursement in healthcare, where a fixed price contract on quantity is supplemented with a relative performance contract on quail­ty. We develop a theoretical model which forecasts the crowding out of most alt­ruistic providers. Using the example of Medicare’s nationwide natural experiment with a relative performance contract on quality (the data for 3000 acute care hospitals in 2004-2017, with the incentives contract implemented since 2013), we conduct an empirical test of the model predictions. We assume that altruism is hete­rogeneous across hospitals and the values of altruism in each hospital are higher for quality measures which are strongly associated with the patient’s benefit. The analysis employs dynamic panel data estimations to account for «habit-formation» and we exclude pre-reform and post-reform «regression-to-the-mean» effects by modeling the time-dependent long-term mean as a function of hospital characteristics. We focus on highest-quality hospitals and discover a deterioration of quality measures, which may be linked to the patient’s benefit (communication of patients with medical personnel and ability to receive help promptly). It may be interpreted as an illustration of the fact that relative performance incentive contracts may be associated with crowding altruistic providers out of the healthcare market.