# Paying for Health Gains Using Patient Reported Outcome Measures

## TL;DR

This paper explores using patient-reported health outcomes to determine healthcare provider payments, aiming to improve care quality.

## Contribution

The paper introduces a contract theory-based pricing rule for setting optimal performance bonuses in healthcare.

## Key findings

- A bonus should reflect the provider's marginal cost difference before and after policy intervention.
- Estimates of optimal bonuses for hip and knee replacements are provided under various assumptions.
- The approach aims to align provider incentives with patient health improvements.

## Abstract

Payments to healthcare providers are often based on the number of patients with a particular diagnosis or treatment with well known limitations. Payment based on health outcomes, a form of pay‐for‐performance, has long been advocated as a possible solution. We use a contract theory approach and illustrate how it can inform practical implementation of pay‐for‐performance schemes that reward health outcomes. The pricing rule suggests that the bonus should be set to reflect the difference between the provider's marginal cost of a health improvement before the policy intervention and the provider's marginal cost evaluated at the target health set by the purchaser. We provide estimates of the optimal bonus for hip and knee replacement under a range of assumptions about provider cost functions and the value of health improvements.