Money Talks - Paying Physicians for Performance

Abstract

Pay‐for‐performance has been enjoying a growing popularity among healthcare policy makers. It attempts to tie physician payment to quality of care. In a controlled laboratory experiment, we investigate the effect of pay‐for-performance on physician provision behavior and patient benefit. For that purpose, we compare two payment systems, a traditional fee‐for‐service payment system and a hybrid payment system that blends fee‐for‐service and pay‐for‐performance incentives. Physicians are found to respond to pay‐for‐performance incentives. Approximately 89 percent of the participants qualify for a pay‐for‐performance bonus payment in the experiment. The physicians’ relative share of optimal treatment decisions is significantly larger under the hybrid payment system than under fee‐for‐service. A patient treated under the hybrid payment system is significantly more likely to receive optimal treatment than a fee‐for‐service patient of matching type and illness. Pay‐for‐performance in many cases alleviates over‐ and under‐provision behavior relative to fee‐for‐service. We observe unethical treatment behavior (i.e., the provision of medical services with no benefit to the patient), irrespective of the payment system.