Business Publications

Document Type


Publication Date

Fall 10-29-2017


Production and Operations Management

URL with Digital Object Identifier


In this study, we examine performance-based payment contracts to promote the optimal use of an optional diagnostic test for newly diagnosed cancer patients. Our work is inspired by three trends: tremendous increases in the cost of new, advanced cancer drugs; development of new diagnostic tests to allow physicians to tailor treatment to patients; and changes in healthcare funding models that reward quality care. We model the interaction between two parties—a healthcare payer and an oncologist, in which the oncologist has private information about patients’ characteristics (adverse selection) and the payer does not know whether the oncologist takes the optimal course of action (moral hazard). We show that, in the presence of information asymmetry, a healthcare payer should never incentivize an oncologist to use a diagnostic test for all patients, even if the diagnostic test is available for free. Moreover, although the oncologist has additional information about a patient's risk, he cannot always benefit from this private information. We also find that social welfare may not increase as a result of a decrease in the oncologist's concerns regarding the health outcome of patients. Finally, we show that it is not always socially optimal to make a diagnostic test compulsory even if such a policy can be implemented for free.


"This is the peer reviewed version of the following article: Ghamat, S. et al. Contracts to Promote Optimal Use of Optional Diagnostic Tests in Cancer Treatment. Production and Operations Management (2017), which has been published in final form at This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving."

Online Appendix.pdf (620 kB)

Find in your library



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.