Do Physicians' Financial Incentives Affect Medical Treatment and Patient Health?

Abstract

We investigate whether physicians' financial incentives influence health care supply, technology diffusion, and resulting patient outcomes. In 1997, Medicare consolidated the geographic regions across which it adjusts physician payments, generating area-specific price shocks. Areas with higher payment shocks experience significant increases in health care supply. On average, a 2 percent increase in payment rates leads to a 3 percent increase in care provision. Elective procedures such as cataract surgery respond much more strongly than less discretionary services. Non-radiologists expand their provision of MRIs, suggesting effects on technology adoption. We estimate economically small health impacts, albeit with limited precision.Critics contend that fee-for-service medicine leads to high medical expenditures without improving patient health. 1 Alternatively, the incentives embedded in volume-based compensation may facilitate access to valuable treatments (Ellis and McGuire 1986). 2 Determining the fiscal consequences of volume-based payment policies and the health benefits of incremental care are thus pressing empirical tasks (Baicker and Chandra 2011).We study how changes in physicians' financial incentives influence the quantity, composition, and value of health care they provide. Since payment policies may influence medical innovation through their effect on technology adoption (Weisbrod 1991; Chandra and Skinner 2012), we examine their impact on physicians' use of high margin technologies. 3 Finally, we investigate the consequences of incremental treatments and technologies for patient health, the crucial outcome for any intervention in health care financing and delivery. † Go to http://dx.doi.org/10.1257/aer.104.4.1320 to visit the article page for additional materials and author disclosure statement(s).1 For instance, see Arrow et al. (2009), Ginsburg (2011), and Hackbarth, Reischauer, and Mutti (2008. 2 The care physicians provide has personal financial consequences, as 60 percent are self-employed (Wassenaar and Thran 2003, Table 2) and 85 percent of those in group practices have compensation linked to patient care revenues (Medical Group Management Association 1998, Table 12). 3 Past studies, including Acemoglu and Finkelstein (2008) and Finkelstein (2007), investigate the response of such decisions to incentives in the hospital context. The current study is, to the best of our knowledge, the first to do so in the environment of physicians' own practices. NIH Public Access Author ManuscriptAm Econ Rev. Author manuscript; available in PMC 2014 August 26. NIH-PA Author Manuscript NIH-PA Author Manuscript NIH-PA Author ManuscriptWe estimate the effects of payment rates using an overhaul of geographic adjustments to provider reimbursements in the Medicare program. In 1997, Medicare consolidated the areas across which it adjusts physician payments, reducing the number of payment regions nationally from 210 to 89. This consolidation, which is similar to that studied by Rice (1983) in Colorado, ...

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