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 asymmetry¾physicians 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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Paper provided by EconWPA in its series Microeconomics with number
0209001.
Length: 33 pages Date of creation: 24 Sep 2002 Date of revision: Handle: RePEc:wpa:wuwpmi:0209001
Note: Type of Document - microsoft word; prepared on IBM-PC; to print on HP Postscript; pages: 33; figures: included Contact details of provider: Web page: http://129.3.20.41
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Find related papers by JEL classification: H0 - Public Economics - - General H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Martin Gaynor & James B. Rebitzer & Lowell J. Taylor, 2001.
"Incentives in HMOs,"
NBER Working Papers
8522, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Martin Gaynor & James B. Rebitzer & Lowell J. Taylor, 2001.
"Incentives In HMOs,"
Macroeconomics
0111001, EconWPA.
[Downloadable!]
Martin Gaynor & James Rebitzer & Lowell Taylor, .
"Incentives in HMOs,"
GSIA Working Papers
2003-E21, Carnegie Mellon University, Tepper School of Business.
[Downloadable!]
McGuire, Thomas G., 2000.
"Physician agency,"
Handbook of Health Economics,
in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 9, pages 461-536
Elsevier.
[Downloadable!] (restricted)
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