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Paying for Health Gains Using Patient Reported Outcome Measures.

Luigi Siciliani1, James Gaughan2, Nils Gutacker2

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Health Economics
|February 23, 2026
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Summary
This summary is machine-generated.

Pay-for-performance models reward healthcare providers for patient health outcomes. A contract theory approach suggests optimal bonuses should reflect changes in provider costs for health improvements, particularly for procedures like hip and knee replacements.

Keywords:
healthhospitalspay for performancequality

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Area of Science:

  • Health economics
  • Healthcare payment models
  • Contract theory in healthcare

Background:

  • Traditional healthcare payments often focus on volume of services, not patient outcomes.
  • This can lead to inefficiencies and suboptimal patient care.
  • Pay-for-performance (P4P) is an alternative reimbursement model rewarding improved health outcomes.

Purpose of the Study:

  • To apply contract theory to inform the practical implementation of P4P schemes.
  • To develop a pricing rule for determining optimal performance-based bonuses.
  • To estimate optimal bonuses for hip and knee replacement procedures.

Main Methods:

  • Utilized a contract theory framework to model healthcare provider incentives.
  • Derived a pricing rule for performance bonuses based on marginal costs.
  • Estimated optimal bonus payments under various assumptions for hip and knee replacements.

Main Results:

  • The proposed pricing rule suggests bonuses should equal the difference in marginal costs of health improvement pre- and post-intervention.
  • Optimal bonus levels are sensitive to provider cost structures and the purchaser's valuation of health.
  • Estimates provided for optimal bonuses in hip and knee replacement surgery.

Conclusions:

  • Contract theory offers a robust framework for designing effective P4P schemes.
  • Optimally set bonuses can incentivize providers to achieve desired health outcomes.
  • The findings have implications for healthcare payment reform and value-based care initiatives.