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Managed Care, Physician Incentives, and Norms of Medical Practice: Racing to the Bottom or Pulling to the Top?

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  • David J. Cooper
  • James B. Rebitzer

Abstract

The incentive contracts that managed care organizations write with physicians have generated considerable controversy. Critics fear that if informational asymmetries inhibit patients from directly assessing the quality of care provided by their physician, competition will lead to a "race to the bottom" in which managed care plans induce physicians to offer only minimal levels of care. To analyze this issue we propose a model of competition between managed care organizations. The model serves for both physician incentive contracts and HMO product market strategies in an environment of extreme information asymmetry--physicians perceive quality of care perfectly, and patients don't perceive it at all. We find that even in this stark setting, managed care organizations need not race to the bottom. Rather, the combination of product differentiation and physician practice norms causes managed care organizations to race to differing market niches, with some providing high levels of care as a means of assembling large physician networks. We also find that relative physician practice norms, defined endogenously by the standards of medical care prevailing in a market, exert a "pull to the top" that raises the quality of care provided by all managed care organizations in the market. We conclude by considering the implications of our model for public policies designed to limit the influence of HMO incentive systems.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_353.

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Date of creation: Sep 2002
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Handle: RePEc:lev:wrkpap:wp_353

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Web page: http://www.levyinstitute.org

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  1. Gal-Or, Esther, 1985. "Differentiated industries without entry barriers," Journal of Economic Theory, Elsevier, Elsevier, vol. 37(2), pages 310-339, December.
  2. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
  3. Altman, Daniel & Cutler, David & Zeckhauser, Richard J., 2003. "Enrollee Mix, Treatment Intensity, and Cost in Competing Indemnity and HMO Plans," Scholarly Articles 2664300, Harvard University Department of Economics.
  4. Martin Gaynor & James B. Rebitzer & Lowell J. Taylor, 2001. "Incentives in HMOs," NBER Working Papers 8522, National Bureau of Economic Research, Inc.
  5. Kandel, E. & Lazear, E.P., 1990. "Peer Pressure and Partnerships," Papers, Rochester, Business - Managerial Economics Research Center 90-07, Rochester, Business - Managerial Economics Research Center.
  6. David M. Cutler & Mark McClellan & Joseph P. Newhouse, 2000. "How Does Managed Care Do It?," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 526-548, Autumn.
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