Essays on Financial Incentives in Healthcare

Abstract

This dissertation presents three essays on provider payment contracts, focusing on the implications of contract design on the healthcare delivered and the costs of insurance. The first chapter proposes a theoretical framework for designing insurer reimbursement contracts. There is little consensus among insurers on how to reimburse providers, suggesting that relevant contracting metrics are not well understood. My theory suggests that dispersion in treatment needs is a critical determinant for the costs of the payment system, explaining why prospective payment contracts may issue outlier payment adjustments, optimally. The model combines two elements that yield new theoretical results: provider altruism and unobserved patient heterogeneity. Provider altruism is a source of inefficient over-treatment, and treatment caps can efficiently contain overall health care delivery when patient benefits are unobservably disperse. The second chapter proposes a method for evaluating the optimality of provider reimbursement contracts that are partially retrospective, meaning that they condition payment on ex-post reported costs. In a setting where patients heterogeneously benefit from medical care, I derive the optimal linear reimbursement contract for an insurer maximizing the aggregate health of his patients. Then, I propose two ways to empirically calibrate the optimality condition of the insurer with respect to the component of the contract that reimburses retrospectively. I apply one method to the Medicare Outpatient Prospective Payment System, and find that payments are too prospective. The study of the linear contract also provides new theoretical reasons for why insurers may want partially retrospective reimbursements when provider moral hazard is small. The third chapter studies the effects of the Medicare Part B reimbursement formula for drugs, which depends on the lagged average sales price, on dynamic pricing incentives for physician administered drugs. I document evidence that prices for monopoly drugs covered under Medicare Part B evolve according to steep, upward sloping paths, which seems puzzling in light of existing theories about lagged price reimbursement which have been proposed to explain high launch prices. I present competing theories that can help reconcile both the steep price increases and high launch prices.