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A Theory of Utilization Review


  • Dranove David

    () (Kellogg School of Management, Northwestern University)

  • Spier Kathryn E.

    () (Kellogg School of Management, Northwestern University and NBER)


Through utilization review (UR), managed care organizations (MCOs) monitor and alter physician treatment decisions. We show that the value of UR depends on physician incentives. Not surprisingly, when physicians have incentives to significantly overtreat patients, UR can improve social welfare by eliminating unnecessary utilization. More surprisingly, UR can also improve welfare when physicians have incentives to significantly undertreat patients. In this case, UR filters out the least valuable cases, encouraging physicians to recommend more treatments. We also show that the effectiveness of UR depends on MCO precommitment to a treatment approval threshold. Ex ante optimal precommitment can make it appear that the MCO is inappropriately withholding care ex post.

Suggested Citation

  • Dranove David & Spier Kathryn E., 2003. "A Theory of Utilization Review," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 2(1), pages 1-21, August.
  • Handle: RePEc:bpj:bejeap:v:contributions.2:y:2003:i:1:n:9

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    References listed on IDEAS

    1. Stranlund, John K., 1997. "Public Technological Aid to Support Compliance to Environmental Standards," Journal of Environmental Economics and Management, Elsevier, vol. 34(3), pages 228-239, November.
    2. Isaac Ehrlich, 1974. "Participation in Illegitimate Activities: An Economic Analysis," NBER Chapters,in: Essays in the Economics of Crime and Punishment, pages 68-134 National Bureau of Economic Research, Inc.
    3. Deacon Robert T., 1995. "Assessing the Relationship between Government Policy and Deforestation," Journal of Environmental Economics and Management, Elsevier, vol. 28(1), pages 1-18, January.
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    5. Fullerton Don & West Sarah E, 2010. "Tax and Subsidy Combinations for the Control of Car Pollution," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-33, February.
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    Cited by:

    1. Francisco J. Gomes & Laurence J. Kotlikoff & Luis M. Viceira, 2012. "The Excess Burden of Government Indecision," Tax Policy and the Economy, University of Chicago Press, vol. 26(1), pages 125-164.
    2. Philippe Choné & Ching-To Albert Ma, 2011. "Optimal Health Care Contract under Physician Agency," Annals of Economics and Statistics, GENES, issue 101-102, pages 229-256.
    3. Kuhn, Michael & Siciliani, Luigi, 2013. "Manipulation and auditing of public sector contracts," European Journal of Political Economy, Elsevier, vol. 32(C), pages 251-267.
    4. Liu, Ting & Ma, Ching-to Albert, 2013. "Health insurance, treatment plan, and delegation to altruistic physician," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 79-96.

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