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Rents for Pills: Financial incentives and physician behavior

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  • Müller, Tobias
  • Schmid, Christian
  • Gerfin, Michael

Abstract

We study the impact of financial incentives on the prescription behavior of physicians based on a recent reform in two large Swiss cities. The reform opened up an additional income channel for physician by allowing them to earn a markup on drugs they prescribe to their patients. We find that the reform leads to an increase in drug costs by about 4%–5% per patient translating to significantly higher physician earnings. The revenue increase can be decomposed into a substitution and rent-seeking component. Our analysis indicates that physicians engage in rent-seeking by substituting larger with smaller packages and by cherry-picking more profitable brands. Although patient health is not sacrificed, the rent-seeking behavior results in unnecessary costs for society.

Suggested Citation

  • Müller, Tobias & Schmid, Christian & Gerfin, Michael, 2023. "Rents for Pills: Financial incentives and physician behavior," Journal of Health Economics, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:jhecon:v:87:y:2023:i:c:s0167629622001254
    DOI: 10.1016/j.jhealeco.2022.102711
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    More about this item

    Keywords

    Financial incentives; Rent-seeking; Prescription behavior; Health spending;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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