Economics of Pay-For-Performance Contracts

Below is a simple algebraic representation of a physician pay-for-performance contract.

p=C+ d(T - C)

where

p=Physician payment per patient

T=HMO's target payment per physician.

C= Physician expenses per patient

d= Physician Risk sharing parameter.

Note that the T is the rate the HMO would pay under hard capitation. Discuss the incentives.

Problem 1.Calculate the Physician's profits/loss under the following scenarios.

a.T=$100C =$80d= 25%

b.T=$100C = $120d= 25%

Show your calculations for problem 1; briefly comment on the interpretation

Problem 2.Calculate the Physician's profits/loss under the following scenarios.

a.T=$100C =$80d= 75%

b.T=$100C = $120d= 75%

Show your calculations for problem 2; briefly comment on the interpretation

Problem 3.You are about to graduate medical school, and you are considering joining an IPA (Independent Practice Association).You have a choice between joining two competing IPAs that are identical, except that one IPA has an HMO contract described in (1), while the other has a contract described in (2).Your cost of practice depends on the severity-of-illness of patients who walk through your door, so you have no way of knowing a priori what these costs will be.

Which contract would you choose:

a. based on economic incentives (briefly explain)

b. based on any other considerations (briefly explain).