Untitled

• ❑ Physicians both provide important labor in medical care production and make key decisions in the health system.
• Hospitals = ‘Doctors’ Workshops’ (Pauly, 1980)
• Since the physician largely controls and directs the use of medical inputs as an agent for the patient, physician practice decisions heavily influence the quantity, quality, and cost of the health care system.
• The doctor’s large information advantage over the patient leads researchers to question whether the typical physician is really a “perfect” agent, or perhaps, at times, even induces patient demand in order to increase income.
• Patients expect scientifically based medical practice, and this raises yet another information question: Is each doctor well informed regarding current best medical practice?
• A BENCHMARK MODEL OF THE PHYSICIAN’S PRACTICE
• introduced by McGuire and Pauly (1991)
• -the model captures most of the observed physician behaviors as special cases of a utility-maximizing physician decision maker. (not just profits) In this benchmark model, the physician gets utility from (1) net income and (2) leisure, and (3) disutility from inducement, NOTE: Inducement – is the physician’s own efforts to induce patients to buy more care than appears medically necessary. This last factor introduces the supplier-induced demand (SID) controversy into the model (Q: whether physicians use their knowledge advantage to abuse their agency role for monetary gain.)
• U = U(p, L, I) where p is the net income from the practice; L is the physician’s leisure time, and I is the degree of inducement. The physician can choose any amount of labor and inducement effort consistent with the profit level implied by these choices With three variables to consider, the physician must consider the willingness to trade off between three pairs of goals: (1) Net income p and Leisure L; (2) Leisure L and Inducement I; (3) Net income p and Inducement I.
• Tradeoff between Income and Leisure ▪ -Assume that the work hours return a constant revenue, w, for each hour worked. ▪ -“wage,” w, determines the slope of this labor– leisure tradeoff. ▪ It follows that higher wage levels w2> w1, and then w3> w2, will result in steeper rising income lines.
• Tradeoff between Income and Leisure

  1. Wage levels (w1, w2, w3) and labor on axes

  2. Backward-bending labor supply curve
• Situation A' to B'

  Physician primarily motivated by higher wages to substitute labor for leisure
• Situation B' to C'

  • Physician's income effect dominates substitution effect
  • Physician becomes rich enough to wish to spend more time enjoying the income
• At C, and wage falls

  • Physician shown would move along the curves toward point B'
  • Implies a wish to compensate for lost income by working more
• Tradeoff between Net Income and Inducement ▪ The model proposes that physicians dislike inducing patient demand, viewing such activity as “less than professional.” ▪ With each unit of induced patient care, the physician experiences a decline in utility that must be offset by the extra utility gained from the extra income that inducement brings. ▪ The indifference curves represent the physician’s preferences. ▪ The indifference curves slope upward because one of the two “goods,” I, is really “bad.
• Tradeoff between Net Income and Inducement ▪ To remain on the same indifference curve, the physician must gain additional net income to offset the disutility of engaging in a higher level of I. ▪ As is the usual case, however, higher curves are preferred.
• QUESTION: Do Physicians Respond to Financial Incentives?

  Yes
• Benchmark model


  Assumes that physicians seek profits among other goals
• There is ample evidence that suggests physicians do respond to profit incentives
• Physician output changes when facing different reimbursement methods

  1. Paid per service provided

  2. Given capitation, a fixed total payment
• Physician agency


  On becoming ill, consumers hire health care professionals to serve as agents
• Agency


  • Professionals have a great deal more knowledge of the subject at hand than the consumer
  • Parties have unequal knowledge, referred to as asymmetric information
• Physician as agent, patient as principal


  In medicine, the physician is the agent, and the patient is the principal
• Out of self-interest, physicians may

  Violate their roles as agents
• Perfect agents


  Make those choices and recommendations on behalf of the patients that the patients themselves would have made if they had the same information
• When physicians are paid per service provided

  They provide more services than when they are given capitation
• Physicians who knowingly induce their patients to consume other than this optimal amount of care are in violation of agency
• Physicians respond to income pressures on their practice by striving to increase their incomes
• In Norway, patients are required to register with a physician, creating a patient list for each physician


  Physicians with short lists tend to grow their lists more than average during the next five years to make up for reduced income
• OB/GYN physicians will recommend caesarean section, a more lucrative treatment


  When their practice incomes are threatened by competition
• Is supplier-induced demand necessarily bad? 05 ▪ CASE #1: ▪ The physicians who induce their patients to have an unneeded and risky heart surgery, we would say, are outright fraudulent. ▪ CASE #2: ▪ However, if a physician recommended an unneeded follow-up visit, while technically a violation of agency, it would not warrant public oversight
• Does all supplierinduced demand entail violation?

  ▪ NO. ▪ It is logically possible to observe supplier inducement that entails no violation of agency. ▪ For example, a physician may encourage a patient to exercise more or undergo diagnostic screening more frequently. Inducing more care does no one harm if it encourages a move toward the patient optimum. ▪ Considered as Complements, which may increase utility, and may even increase the probability of good health
• Supplier-Induced Demand


  Physicians' incentives affect their practice
• Supply and Demand Model

  1. Increase in supply from S1 to S2

  2. Increased quantity consumed from Q1 to Q2

  3. Decreased price (or fee) from P1 to P2
• Modeling Supplier-Induced Demand


  1. Understand the motivations of physicians

  2. Understand the data we observe
• If all physicians in the market behaved like our individual physician, an increase in the supply of physicians would lead to an increased aggregate quantity of care
• Assumptions


  • Asymmetric information advantages give the physicians the power to misuse their agency relationship with the patient to personal advantage
• Uwe Reinhardt's "fee test"


  A rise in physician fees to a level higher than before the supply increase could be caused only by inducement
• Target Income Hypothesis


  Economists proposed this as a criticism of physician behavior, arguing that physicians have desired incomes that they strive to achieve or to restore whenever actual income falls below the targets
• The physician depicted at equilibrium E1 has chosen to induce demand by OIE1