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The Ethics and Economics of Kickbacks and Fee Splitting


  • Mark V. Pauly


This paper examines the welfare effects of fee splitting or kickbacks paid by one physician to another in return for patient referrals. This practice is regarded as unethical and illegal in most cases, but it is shown that in a principal-agent context it is possible for fee splitting to offer incentives which actually improve patient welfare. Fee splitting occurs when there is a divergence between price and the referral partner's marginal opportunity cost. A restructuring of fee levels to yield physicians equal net income per unit time would remove the incentive for fee splitting. In the absence of this reform it is shown that fee splitting may induce the first-contact physician to refer instead of performing a lower quality procedure himself, and can also be a tool for eroding specialist monopoly power.

Suggested Citation

  • Mark V. Pauly, 1979. "The Ethics and Economics of Kickbacks and Fee Splitting," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 344-352, Spring.
  • Handle: RePEc:rje:bellje:v:10:y:1979:i:spring:p:344-352

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    References listed on IDEAS

    1. Edwin Mansfield & John Rapoport & Anthony Romeo & Samuel Wagner & George Beardsley, 1977. "Social and Private Rates of Return from Industrial Innovations," The Quarterly Journal of Economics, Oxford University Press, vol. 91(2), pages 221-240.
    2. Mansfield, Edwin, 1980. "Basic Research and Productivity Increase in Manufacturing," American Economic Review, American Economic Association, vol. 70(5), pages 863-873, December.
    3. Berndt, Ernst R & Christensen, Laurits R, 1974. "Testing for the Existence of a Consistent Aggregate Index of Labor Inputs," American Economic Review, American Economic Association, vol. 64(3), pages 391-404, June.
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    Cited by:

    1. Simona Grassi & Ching-To Albert Ma, 2015. "Information Acquisition, Referral, and Organization," Boston University - Department of Economics - Working Papers Series wp2015-007, Boston University - Department of Economics.
    2. Lee, Frances (Zhiyun Xu), 2013. "Trading between agents for a better match," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 501-515.
    3. Christopher Afendulis & Daniel Kessler, 2011. "Vertical Integration and Optimal Reimbursement Policy," NBER Working Papers 17316, National Bureau of Economic Research, Inc.
    4. Arbatskaya, Maria & Konishi, Hideo, 2012. "Referrals in search markets," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 89-101.
    5. Larry G. Epstein & Hiroaki Kaido & Kyoungwon Seo, 2016. "Robust Confidence Regions for Incomplete Models," Econometrica, Econometric Society, vol. 84, pages 1799-1838, September.
    6. Christopher C. Afendulis & Daniel P. Kessler, 2006. "Tradeoffs from Integrating Diagnosis and Treatment in Markets for Health Care," NBER Working Papers 12623, National Bureau of Economic Research, Inc.
    7. Felder, Stefan & Amann, Erwin, 2017. "No Crowding Out despite Kickbacks: Competition between Gatekeeping GPs," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168116, Verein für Socialpolitik / German Economic Association.
    8. Roman Inderst & Marco Ottaviani, 2012. "Competition through Commissions and Kickbacks," American Economic Review, American Economic Association, vol. 102(2), pages 780-809, April.
    9. Felder, Stefan, 2016. "Kickbacks in Medical Expert Markets," Annual Conference 2016 (Augsburg): Demographic Change 145594, Verein für Socialpolitik / German Economic Association.

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