Dundee Discussion Papers in Economics 125: Third party purchasing and incentives: the "Outcome Movement” and contracts for health services

The Outcomes Movement, also referred to as the “third revolution in medical care” has focused attention and resources on assessing the effectiveness of medical treatments. Outcomes research aims at determining the nature of effective treatment regimes for medical conditions. Equipped with such information, health care purchasers will be better able to regulate suppliers of health services. In this paper, we consider whether payments conditioned on treatment delivered or on health outcome obtained makes better use of the information provided by outcomes research. We show that consumers can help third party purchasers allevaite incentive problems due to asymmetric information. We find that, if patients in deciding whether to be treated, are responsive to the treatments offered payment-by results may be preferred. We further find that where health care suppliers operate not-for-profit, there is an incentive for purchasers to specify payment-by results.