Contracting with sequential care providers.

Background: The literature on care coordination refers to high service costs, low quality, and consumer dissatisfaction, as the consequences of institutional fragmentation and uncoordinated care.

Objectives: In this work we are concerned with the role financial incentives (reimbursement schemes) might play in promoting coordinated care when providers are organized sequentially along a care pathway and the clients (patients) are transferred from one caregiver to another.

Methods: We apply a game-theoretic framework to analyze the situation where three providers provide services to a patient group and there are interdependencies between the providers in terms of cost-externalities and altruistic patient preferences.

Results: For activity-based contracts, the incentives for cost containment are efficient (internal efficiency), while the incentives for quality provision are inefficient due to preference misalignments and poor coordination that derive from funding costs, imperfect altruism, the presence of externalities and strategic behavior. The optimal cost-based contracts are mixed contracts that vary across providers according to their position in the production chain, and they consist of the following three elements; (i) fixed budgets, (ii) payments contingent upon the treatment costs of production chain followers (integrated penalties), and (iii) payments contingent upon the providers' own treatment costs (positive or negative cost-sharing). For these contracts, the providers are typically internally inefficient, while the inefficiencies associated with preference misalignments and poor coordination are solved.

Conclusions: Our production chain perspective, when compared to single-provider approaches, enhances the appeal of cost-based contracts relative to pure prospective contracts.