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The Independent Institute
Working Paper #32

You Get What You Pay For: Result-Based Compensation for Health Care


Abstract: This article proposes greatly increased use in the health care sector of incentive arrangements that tie providers’ compensation to the outcomes they deliver for patients. Although result-based compensation arrangements (RBCAs) are used frequently in other principal/agent relationship, insurers, employers, managed care organizations, and other health care payers rarely use them to link providers’ economic interests to patients’ interests in enjoying good health. The need for health care RBCAs is apparent. Studies of health care quality repeatedly uncover serious problems: underutilization of valuable services; overutilization of ineffective services; significant practice variations; significant differences in mortality and morbidity rates across providers; unacceptable accident rates; and widespread failures to use proven safety techniques. After briefly surveying the quality of care literature, this article explores the potential for RBCAs to ameliorate these problems by incentivizing providers to use better judgment when recommending treatments and to use better procedures when delivering care. The article also responds to ethical, technical, and other objections to RBCAs and discusses examples in which health care RBCAs have been used with success.