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How Do Doctors Respond to Incentives? Unintended Consequences of Paying Doctors to Reduce Costs

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  • Diane Alexander

Abstract

Billions of dollars have been spent on pilot programs searching for ways to reduce health care costs. I study one such program, in which hospitals pay doctors bonuses for reducing the total hospital costs of admitted Medicare patients. Doctors respond to the bonuses by becoming more likely to admit patients whose treatment can generate high bonuses and sorting healthier patients into participating hospitals. Conditional on patient health, however, doctors do not reduce costs or change procedure use. These results highlight the ability of doctors to game incentive schemes and the risks of basing nationwide health care reforms on pilot programs.

Suggested Citation

  • Diane Alexander, 2020. "How Do Doctors Respond to Incentives? Unintended Consequences of Paying Doctors to Reduce Costs," Journal of Political Economy, University of Chicago Press, vol. 128(11), pages 4046-4096.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/710334
    DOI: 10.1086/710334
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Chris Sampson’s journal round-up for 7th December 2020
      by Chris Sampson in The Academic Health Economists' Blog on 2020-12-07 12:00:03

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    Cited by:

    1. Brosig-Koch, Jeannette & Hennig-Schmidt, Heike & Kairies-Schwarz, Nadja & Kokot, Johanna & Wiesen, Daniel, 2024. "A new look at physicians’ responses to financial incentives: Quality of care, practice characteristics, and motivations," Journal of Health Economics, Elsevier, vol. 94(C).
    2. Anup Malani & Cynthia Kinnan & Gabriella Conti & Kosuke Imai & Morgen Miller & Shailender Swaminathan & Alessandra Voena & Bartosz Woda, 2024. "Evaluating pricing health insurance in lower-income countries: A field experiment in India," IFS Working Papers W24/33, Institute for Fiscal Studies.
    3. Dodini, Samuel & Lundborg, Petter & Løken, Katrine & Willén, Alexander, 2025. "The Fatal Consequences of Brain Drain," Discussion Paper Series in Economics 9/2025, Norwegian School of Economics, Department of Economics.
    4. He, Qinghong & Liu, Gordon G. & Liu, Xiangbo & Tang, Daisheng, 2025. "Effects of separating drug sales from treatment on medical disputes," Social Science & Medicine, Elsevier, vol. 368(C).
    5. Brosig-Koch, Jeannette & Groß, Mona & Hennig-Schmidt, Heike & Kairies-Schwarz, Nadja & Wiesen, Daniel, 2021. "Physicians' incentives, patients' characteristics, and quality of care: A systematic experimental comparison of fee-for-service, capitation, and pay for performance," Ruhr Economic Papers 923, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    6. Malani, Anup & Kinnan, Cynthia & Conti, Gabriella & Imai, Kosuke & Miller, Morgen & Swaminathan, Shailender & Voena, Alessandra & Woda, Bartek, 2024. "Evaluating and pricing health insurance in lower-income countries: A field experiment in India," CEPR Discussion Papers 19326, C.E.P.R. Discussion Papers.
    7. Mathieu Lambotte & Benjamin Montmartin, 2025. "Competition, Conformism and the Voluntary Adoption of Policies Designed to Freeze Prices," GREDEG Working Papers 2025-17, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France, revised Jul 2025.
    8. Cadena, Brian C. & Smith, Austin C., 2022. "Performance pay, productivity, and strategic opt-out: Evidence from a community health center," Journal of Public Economics, Elsevier, vol. 206(C).
    9. Andy Ye Yuan & Bernard Black & Timea Viragh & David J. Magid & Qian Luo & Ali Moghtaderi, 2023. "Effect of financial incentives on hospital‐cardiologist integration and cardiac test location," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 20(3), pages 570-608, September.
    10. Nibene H. Somé & Bernard Fortin & Bruce Shearer, 2024. "Measuring physicians' response to incentives: Labour supply, multitasking and earnings," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(2), pages 622-661, May.
    11. Anup Malani & Phoebe Holtzman & Kosuke Imai & Cynthia Kinnan & Morgen Miller & Shailender Swaminathan & Alessandra Voena & Bartosz Woda & Gabriella Conti, 2021. "Effect of Health Insurance in India: A Randomized Controlled Trial," Working Papers 2021-055, Human Capital and Economic Opportunity Working Group.
    12. Travova, Ekaterina, 2023. "Under pressure? Performance evaluation of police officers as an incentive to cheat," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 1143-1172.
    13. Barton Willage & Marisa Carlos & Kevin Callison, 2023. "Non‐monetary obstacles to medical care: Evidence from postpartum contraceptives," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 42(4), pages 1045-1064, September.
    14. Nicholas Benson & Jose Joaquin Lopez, 2024. "Surgeons' response to reimbursement changes for alternative procedures: Evidence from spine fusion in the U.S," Contemporary Economic Policy, Western Economic Association International, vol. 42(1), pages 41-55, January.
    15. Liran Einav & Amy Finkelstein & Yunan Ji & Neale Mahoney, 2022. "Voluntary Regulation: Evidence from Medicare Payment Reform," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(1), pages 565-618.
    16. Erina Ytsma, 2022. "Effort and Selection Effects of Performance Pay in Knowledge Creation," CESifo Working Paper Series 10153, CESifo.
    17. Attema, Arthur E. & Galizzi, Matteo M. & Groß, Mona & Hennig-Schmidt, Heike & Karay, Yassin & L’Haridon, Olivier & Wiesen, Daniel, 2023. "The formation of physician altruism," Journal of Health Economics, Elsevier, vol. 87(C).
    18. Ahorner, Solveig, 2023. "The Influence of Physician Rating Websites on the Quality of Primary Care," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277615, Verein für Socialpolitik / German Economic Association.
    19. Mitchell Hoffman & Christopher T. Stanton, 2024. "People, Practices, and Productivity: A Review of New Advances in Personnel Economics," NBER Working Papers 32849, National Bureau of Economic Research, Inc.
    20. Caitlin Carroll & Michael Chernew & A. Mark Fendrick & Joe Thompson & Sherri Rose, 2017. "Effects of Episode-Based Payment on Health Care Spending and Utilization: Evidence from Perinatal Care in Arkansas," NBER Working Papers 23926, National Bureau of Economic Research, Inc.
    21. Dillender, Marcus & Jinks, Lu & Lo Sasso, Anthony T., 2023. "When (and why) providers do not respond to changes in reimbursement rates," Journal of Public Economics, Elsevier, vol. 217(C).

    More about this item

    JEL classification:

    • I10 - Health, Education, and Welfare - - Health - - - General
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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    1. How Do Doctors Respond to Incentives? Unintended Consequences of Paying Doctors to Reduce Costs (JPE 2020) in ReplicationWiki

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