Physicians' incentives, patients' characteristics, and quality of care: A systematic experimental comparison of fee-for-service, capitation, and pay for performance

This paper systematically studies how performance pay, complementing either baseline feefor-service or capitation, affects physicians' medical service provision and the quality of care. Using a series of controlled experiments with physicians and students, we test the incentive effect of performance pay at a within-subject level. A discrete bonus is granted if a quality threshold is reached, which varies with the patients' severity of illness. We find that performance pay significantly reduces non-optimal service provision and enhances the quality of care. Effect sizes depend on the patients' severity of illness and whether the baseline is fee-for-service or capitation. Health policy implications, including a cost benefit analysis of introducing performance pay, are discussed.