Mete Ozbek (Koc University), Hessam Bavafa (University of Wisconsin), Evrim Didem Gunes (Koc University), Lerzan Ormeci (Koc University), Beyond Fee-for-Service: How Comprehensive Contracts Can Transform Primary Care (2023):
Problem definition: We study "comprehensive contracts," which are performance-based reimbursement schemes for managing patients with chronic conditions. If well designed, these contracts can transform primary care beyond the traditional fee-for-service model as they offer a more holistic approach to care by inducing providers to offer various services, including preventive care, chronic disease management, and care coordination. Methodology/results: We employ a stylized model within the Principal-Agent framework to study primary care practice (PCP) capacity allocation under a comprehensive contract offered by the payer. The contract is motivated by two current performance-based contracting systems for primary care in the US: Comprehensive Primary Care Plus and Primary Care First Model reimbursement systems of the Centers for Medicare and Medicaid Services. We first show that a pure fee-for-service contract fails to induce PCPs to allocate capacity for comprehensive care. We then analyze a comprehensive contract offering a capitation payment, a performance bonus, or a combination and show that such a contract is necessary but not sufficient in inducing a comprehensive care effort. Managerial implications: We identify PCP effectiveness in delivering comprehensive care as a crucial consideration in designing comprehensive contracts and show that offering comprehensive contracts to highly effective PCPs enhances access to healthcare and improves outcomes. In addition, we analytically characterize the optimal comprehensive contracts and show that they fail to achieve the first-best outcomes, even under the risk-neutrality of the PCP. Under the optimal contract, however, the PCP's revenue is increasing in their effectiveness level, which is a desirable spillover effect. Our numerical analysis suggests that a comprehensive contract with a strict budget limitation could fail to attract the majority of PCPs, and the payer should consider improving the revenue potential of PCPs for meaningful participation.