Designing Payment Contracts for Healthcare Services to Induce Information Sharing : The Adoption and the Value of Health Information Exchanges (HIEs)

Recent initiatives to improve health care quality and reduce costs have centered around payment mechanisms and IT-enabled health-information exchanges (HIEs). Such initiatives have profound influences both on providers' choices regarding health care effort levels and HIE adoption and on patients' choices of providers. Using a game-theoretical model of a healthcare setup, we examine the role of payment model in aligning providers' and patients' incentives to make socially optimal (i.e., first best) choices. We show that the traditional fee-for-service (FFS) payment model does not induce the first best. The more recent pay-for-performance (P4P) models may induce the first best if patients have only a weak incentive to switch providers during a health episode and hence provider coordination is less of an issue. We identify an episode-based payment (EBP) model that induces the first best, regardless of the patient incentive to switch providers. When a P4P model induces the first best, the proposed EBP model reduces to that P4P model. When patients have a moderate or a strong incentive to switch providers, the first-best inducing EBP model is multilateral in the sense that the payment to a provider depends not only on the provider's own efforts and outcomes but also those of the other provider. Furthermore, the payment in this EBP model is sequence dependent in the sense that payment to a provider is contingent upon whether the patient visits the provider first or second. We show that the proposed EBP model achieves the lowest healthcare cost and the highest quality, but does not always result in the lowest payment to providers among the three payment models. We further show that the value of HIEs depends critically on the payment model as well as the patients' incentives to switch providers. The value of HIEs is higher when patients have stronger incentives to switch regardless of the payment model. Moreover, the value of HIEs is highest under the FFS model and lowest under the P4P models. Hence, assessing the value of HIEs in isolation from the underlying payment mechanism and patient switching behavior may result in under- or overestimation of the HIE value. Therefore, as payment models evolve over time, there is a real need to reevaluate the value of HIE adoption and the government policies that induce providers to adopt HIE