Incentive Programs for Reducing Readmissions when Patient Care is Co‐Produced

To reduce preventable readmissions, many healthcare systems are transitioning from fee‐for‐service (FFS) to other reimbursement schemes such as pay‐for‐performance (P4P) or bundled payment (BP) so that the funder of a healthcare system can transfer to the hospital some of the financial risks associated with patient rehospitalizations. To examine the effectiveness of different schemes (FFS, P4P, and BP), we develop a “health co‐production” model in which the patient's readmissions can be “jointly controlled” by the efforts exerted by both the hospital and the patient. Our analysis of the equilibrium outcomes reveals that FFS cannot entice the hospital and the patient to exert readmission‐reduction efforts. Relative to BP, we find that P4P is more effective in reducing readmissions over a wider range of scenarios. However, BP tends to be more effective in keeping lower combined patient costs and funder payments to the hospital. Finally, we find that some patient cost‐sharing can be optimal for the funder under both P4P and BP.