Physician Response to Target-Based Performance Payment

In many health care systems payers reward physicians for reaching predetermined performance targets. These targets may be based on measures for which own performance is difficult to predict. This paper uses a principal-agent model to analyse physicians’ response to a target-based performance payment and the role uncertainty about own performance plays. It is shown that physicians’ response depends on their type (determined by abilities and preferences), the size of the performance payment, and their uncertainty about own performance. Only in the presence of uncertainty do all physician types respond to the target payment, and they respond by increasing effort. Meanwhile, increased uncertainty leads some physician types to reduce the magnitude of their response and other types to increase their response. Therefore, when designing target-based payment schemes it is important to perform baseline measurements to assess the distribution of physician types and to predict physicians’ ability to assess own performance.