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Payment Mechanisms in the Healthcare Industry: An Experimental Study of Physician Incentives in a Multiple Principal Agent Setting

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  • Ellen P. Green

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    (Department of Economics, University of Delaware)

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    Abstract

    Current failures in the healthcare industry emphasize the need for a more fundamental understanding of how these contracts incentivize doctors. To aid this understanding, we treat the established physician-client-employer relationship as a multiple principal agent problem. We use a laboratory experiment, with a real-effort task, to test the relative performance of common payment mechanisms employed in this dual-principal agent relationship (Piece Rate, Flat Rate, Salary, Bonus, and Socialization). This study suggests, contrary to standard contract theory, that relying on extrinsic incentives to motivate physicians may be detrimental and costly for the healthcare industry.

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    File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2012/UDWP2012-11.pdf
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    Bibliographic Info

    Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 12-11.

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    Length: 29 pages
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:dlw:wpaper:12-11.

    Contact details of provider:
    Postal: Purnell Hall, Newark, Delaware 19716
    Phone: (302) 831-2565
    Fax: (302) 831-6968
    Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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    Related research

    Keywords: Multiple principal agent theory; intrinsic motivation; other-regarding behavior; Fee-For-Service; Capitation; Salary;

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    References

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    1. Ma, Ching-to Albert & McGuire, Thomas G, 1997. "Optimal Health Insurance and Provider Payment," American Economic Review, American Economic Association, vol. 87(4), pages 685-704, September.
    2. Mathias Dewatripont & Patrick Bolton, 2005. "Contract theory," ULB Institutional Repository 2013/9543, ULB -- Universite Libre de Bruxelles.
    3. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
    4. Fehr, Ernst & Klein, Alexander & Schmidt, Klaus M., 2005. "Fairness and Contract Design," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 67, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    5. Gürtler, Marc & Gürtler, Oliver, 2011. "Inequality aversion and externalities," Working Papers IF36V1, Technische Universität Braunschweig, Institute of Finance.
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    7. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 75-102, December.
    8. Amihai Glazer, 2008. "Optimal Contracts When a Worker Envies His Boss," Journal of Law, Economics and Organization, Oxford University Press, vol. 24(1), pages 120-137, May.
    9. Hideshi Itoh, 2004. "Moral Hazard and Other-Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45.
    10. Englmaier, Florian & Wambach, Achim, 2005. "Optimal Incentive Contracts under Inequity Aversion," IZA Discussion Papers 1643, Institute for the Study of Labor (IZA).
    11. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 1-33, February.
    12. Cromwell, Jerry & Mitchell, Janet B., 1986. "Physician-induced demand for surgery," Journal of Health Economics, Elsevier, vol. 5(4), pages 293-313, December.
    13. Gosden, Toby & Sibbald, Bonnie & Williams, Jackie & Petchey, Roland & Leese, Brenda, 2003. "Paying doctors by salary: a controlled study of general practitioner behaviour in England," Health Policy, Elsevier, vol. 64(3), pages 415-423, June.
    14. Holmstrom, Bengt & Tirole, Jean, 1991. "Transfer Pricing and Organizational Form," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 201-28, Fall.
    15. Forsythe Robert & Horowitz Joel L. & Savin N. E. & Sefton Martin, 1994. "Fairness in Simple Bargaining Experiments," Games and Economic Behavior, Elsevier, vol. 6(3), pages 347-369, May.
    16. Dranove, David & Wehner, Paul, 1994. "Physician-induced demand for childbirths," Journal of Health Economics, Elsevier, vol. 13(1), pages 61-73, March.
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