Optimal compensation rule under provider adverse selection and moral hazard

Area of Science:

• Health Economics
• Incentive Theory
• Information Economics

Background:

• Healthcare provider payment mechanisms are widely studied.
• Optimal compensation rules under moral hazard and adverse selection remain unclear.

Purpose of the Study:

• To determine optimal healthcare provider compensation rules.
• To analyze scenarios with unobservable provider effort and private ability information.

Main Methods:

• Theoretical modeling of principal-agent problems in healthcare.
• Analysis of optimal contract design under asymmetric information.

Main Results:

• Zero fee-for-service is optimal when only provider effort is unobservable.
• First-best outcomes are infeasible when both moral hazard and adverse selection are present.
• A combination of capitation, fee-for-service, and pay-for-performance is the second-best solution.

Conclusions:

• Provider compensation must account for both effort and ability.
• Mixed payment models are necessary to address complex information asymmetries in healthcare.
• Optimal contracts balance incentives for effort and information revelation.