Labour Supply, Service Intensity and Contract Choice: Theory and Evidence on Physicians

We develop and estimate a structural model that incorporates service intensity and endogenous contract choice into the standard labour supply framework. We apply our model to data collected on specialist physicians working in Quebec (Canada). These physicians are typically paid a fee-for-service (FFS) contract. Our panel data set covers a period of policy reform which allowed physicians either to remain on FFS or to adopt a mixed remuneration (MR) contract, under which they receive a per diem as well as a reduced FFS. We estimate the preference parameters of physicians governing the choice of contract and their hours worked and services provided. We use our estimates to simulate labour supply elasticities, to predict (ex ante) the effects of contracts on physician behaviour, and to evaluate selection effects. The supply of services is reduced under a MR contract, suggesting incentives matter. The hours spent seeing patients is less sensitive to incentives than the supply of services. Our results suggest that a reform forcing all physicians to adopt the MR system would have had substantially larger effects on physician behaviour than were measured under the observed reform.