Optimal Contract Design for End-of-Life Care Payments

TL;DR

This paper develops a principal-agent model with mixed payment systems to design optimal contracts that incentivize appropriate end-of-life care, aiming to reduce unnecessary treatments and healthcare costs.

Contribution

It introduces a novel analytical framework for deriving optimal EOL care contracts considering different provider risk tolerances within a principal-agent model.

Findings

Derived explicit optimal contracts for various risk models

Demonstrated the model using a simulation for brain injury monitoring

Showed potential for cost reduction through better incentive alignment

Abstract

A large fraction of total healthcare expenditure occurs due to end-of-life (EOL) care, which means it is important to study the problem of more carefully incentivizing necessary versus unnecessary EOL care because this has the potential to reduce overall healthcare spending. This paper introduces a principal-agent model that integrates a mixed payment system of fee-for-service and pay-for-performance in order to analyze whether it is possible to better align healthcare provider incentives with patient outcomes and cost-efficiency in EOL care. The primary contributions are to derive optimal contracts for EOL care payments using a principal-agent framework under three separate models for the healthcare provider, where each model considers a different level of risk tolerance for the provider. We derive these optimal contracts by converting the underlying principal-agent models from a bilevel optimization problem into a single-level optimization problem that can be analytically solved. Our results are demonstrated using a simulation where an optimal contract is used to price intracranial pressure monitoring for traumatic brain injuries.