Selection Incentives in a Performance-Based Contracting System
Abstract
Objective
To investigate whether a performance-based contracting (PBC) system provides incentives for nonprofit providers of substance abuse treatment to select less severe clients into treatment.
Data Sources
The Maine Addiction Treatment System (MATS) standardized admission and discharge data provided by the Maine Office of Substance Abuse (OSA) for fiscal years 1991–1995, provides demographic, substance abuse, and social functional information on clients of programs receiving public funding.
Study Design
We focused on OSA clients (i.e., those patients whose treatment cost was covered by the funding from OSA) and Medicaid clients in outpatient programs. Clients were identified as being “most severe” or not. We compared the likelihood for OSA clients to be “most severe” before PBC and after PBC using Medicaid clients as the control. Multivariate regression analysis was employed to predict the marginal effect of PBC on the probability of OSA clients' being most severe after controlling for other factors.
Principal Findings
The percentage of OSA outpatient clients classified as most severe users dropped by 7 percent (p<=0.001) after the innovation of performance-based contracting, compared to the increase of 2 percent for Medicaid clients. The regression results also showed that PBC had a significantly negative marginal effect on the probability of OSA clients being most severe.
Conclusions
Performance-based contracting gave providers of substance abuse treatment financial incentives to treat less severe OSA clients in order to improve their performance outcomes. Fewer OSA clients with the greatest severity were treated in outpatient programs with the implementation of PBC. These results suggest that regulators, or payers, should evaluate programs comprehensively taking this type of selection behavior into consideration.
State and local governments are major sources of financing for substance abuse services. In 1997, 27 percent of total mental health and substance abuse spending was funded by state or local governments (Mark et al. 2000). Like other payers, governments need efficient forms of payment to offer providers financial incentives to achieve cost-efficiency and to allow payers to monitor performance. Performance-based contracting (PBC) has been promoted by the Institute of Medicine (IOM) as a “promising mechanism to manage and ensure the effectiveness of substance abuse services” (Institute of Medicine 1990). Generally, performance-based contracting ties continuation of funding or the level of funding to certain treatment outcomes. Maine implemented a PBC system in fiscal year 1993. In this system, nonprofit providers (programs) of substance abuse treatment received budgets each year from the state government to finance the cost of treating clients who could not pay. Maine monitored and evaluated programs’ performance to “redirect funds, away from less efficient programs and toward programs which have proven themselves able to ‘produce’ good treatment outcomes” (Commons, McGuire, and Riordan 1997).
Performance-based contracting is designed to encourage providers to provide care to high-priority state clients in a cost-effective manner, but it may have unintended consequences: selection incentives may lead to behavior against the payer's interests. The basic issue is that since providers’ performance is rewarded and usually measured by the average performance of clients at discharge, providers have incentives to select the less severely ill clients who are more likely to have better performance levels at discharge in the first place. Thus, providers may avoid treating more severely ill clients.
Problems related to selection have attracted attention in the literature on optimal payment systems (for an excellent discussion, see Newhouse 1996). When providers are paid on the basis of cost, there is no direct financial incentive to select a low-cost patient over a high-cost one. In a prospective payment system, however, providers receive a fixed fee for each patient. Treatment cost for severely ill patients can be above the fixed fee, motivating providers with financial incentives to “dump” high-cost patients to improve profitability. Researchers have looked for empirical evidence of a selection problem in various contexts, but data limitations have precluded directly testing whether more severely ill patients are denied treatment. Instead, most studies compare lengths of stay or other related factors across different reimbursement systems (Newhouse 1989; Hill and Brown 1990; Weissert and Musliner 1992; Ellis and McGuire 1996).
The PBC system is not a prospective payment system. It allocates public funds among providers, who are then expected to deliver the contracted units of services. Therefore, funding is not tied to specific individuals. Because of this difference, the incentives for selecting favorable patients also vary. Under prospective payment, more severely ill patients might be rejected for treatment because their treatment costs are higher than the fixed payment and providers will lose money by treating them. Under a PBC system, however, more severely ill patients might be rejected for treatment because they will lower the providers’ overall performance. Providers with bad performance can be punished with less funding in the next period. Both systems provide incentives for health care providers to select people.
This study provides important empirical evidence of selection problems in the health care sector for the first time by examining whether nonprofit providers have selected less severely ill clients into their treatment programs in one specific performance-based contracting system, the PBC system in Maine. While several studies have examined other aspects of the PBC system in Maine, this study's primary contribution is directly testing for selection of patients by their severity levels.
Commons, McGuire, and Riordan (1997) studied the direct effect of this system on providers’ performance. They found that providers’ performance effectiveness was positively related to the innovation of PBC. In post-PBC periods, 60 percent of the programs achieved the effectiveness indicators defined by the state regulator while only 50 percent did so prior to PBC implementation. At the same time, the PBC system might cause some unintended provider behavior such as misreporting, which could make performance look better without actually improving the treatment quality (Commons and McGuire 1997). Performance improvement cannot be completely interpreted as the result of an increase in treatment quality without controlling for the unintended effect.
Given that performance evaluation is based on the information supplied by providers, Lu (1999) argued that providers had an incentive to misreport treatment outcomes. By separating the impact of the PBC on treatment effectiveness into a “true effect” that captured providers’ improved effect induced by PBC and a “reporting effect” that was the result of providers’ misreporting, she found that misreporting existed after the implementation of PBC. The present paper tests for the existence of selection behavior induced by the PBC system.
Source: Commons, McGuire, and Riordan (1997)
Notes: The standard deviations shown in parentheses.
Acknowledgments
I would like to thank Tom McGuire, Ann Hendricks, Randy Ellis, Dan Ackerberg, Albert Ma, Catherine McLaughlin, Stephen Shortell, and two anonymous referees for their helpful comments. The Maine Office of Substance Abuse cooperated in the conduct of the study. All errors and omissions remain my responsibility.
Footnotes
There were, however, no explicit financial reward or penalty schemes. Some providers with good performance were allowed to keep any surplus over a budget or received additional federal block grant funds. For providers who did not meet the targets, special conditions were added to their contracts and OSA worked with them to improve their performance. For a few cases with very low overall performance, OSA renewed the program contracts only for a period of six months (Commons, McGuire, and Riordan 1997).
Initially, special population standards were designed to target the populations that OSA deemed more difficult to treat. (Commons, McGuire, and Riordan 1997) found that providers did not improve significantly in this category after PBC was implemented. They showed that only 55 percent of programs satisfied the special population standards post-PBC compared to 53 percent pre-PBC.
A growing literature questions whether private nonprofit providers are much different, on average, from for-profit providers in matters such as adverse selection and patient-dumping. Duggan (2000) provided an excellent discussion of these issues. His empirical work found that the private nonprofit hospitals have a similar response to profitable opportunities that are created by changes in government policy compared to for-profit hospitals.
Overall, 18 percent clients had “undetermined” counselor-assessed severity in outpatient programs. By cross-examining the relationship between the counselor-assessed severity and self-reported frequency of drug use, we found that the frequency of drug use for those with “undetermined” severity was similar to those identified as “ lifestyle-involved” or “lifestyle-dependent,” and was significantly different from those identified as “dysfunctional” users. This reveals that if the “undetermined” group was included in our analysis, it was more likely to be qualified as less severe rather than most severe clients. Our sensitivity analysis showed that the trend of having fewer most severe OSA clients in post-PBC was robust even when we included the “undetermined” clients into the less severe group or most severe group. We treated this “undetermined” severity as missing value and did not include them in our final analysis.
Research support was provided by grant nos. 1 R01 DA08715-01 and P50 DA10233-03 from the National Institute on Drug Abuse.