Abstract
A longstanding literature has highlighted the tension between the altruism of physicians and their desire for profit. This paper develops new implications for how these competing forces drive pricing and utilization in healthcare markets. Altruism dictates that providers reduce utilization in response to higher prices, but profit-maximization does the opposite. Rational physicians will behave more altruistically when treating poorer patients or those that face higher medical cost burdens, and when foregone profits are lower. These insights help explain the observed heterogeneity in pricing dynamics across different healthcare markets. We empirically test the implications of our model by utilizing two exogenous shocks in Medicare price setting policies. Our results indicate that patient income, out-of-pocket costs, and profitability alone explain up to one-quarter of the variation in price elasticities. Finally, we demonstrate that uniform policy changes in reimbursement or patient cost-sharing may lead to unintended consequences.
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