Policy Analysis in the Health-Services Market: Accounting for Quality and Quantity

We provide a theoretical and empirical framework for evaluating the effects of policy reforms on physician labor supply. We argue that any policy evaluation must account for both the quality and the quantity of services provided. The introduction of quality into the analysis has implications for both the theoretical and empirical analysis of labor supply, and consequently policy evaluation. In particular, endogenous quality choices introduce non-linearities into the budget constraint since the marginal return to an hour of work depends on the quality of services provided. We illustrate by considering a particular example: the recent reform in compensation contracts for specialist physicians in the province of Quebec (Canada). Prior to 1999, most Quebec specialist physicians were paid fee-for-service contracts; they received a piece rate for each clinical service provided. In 1999, the government introduced a mixed remuneration system, under which physicians received a base (half-daily or daily) wage, independent of services provided, and a reduced fee-for-service. Moreover, the government allowed physicians to choose their contract. We derive theoretical results for the effect of the reform on the quantity and quality of services supplied by analyzing "local" prices and virtual income. We propose discretizing the choice set as an empirical approach to policy evaluation in the presence of non-linear budget constraints.