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Saving Lives or Saving Money? Understanding the Dual Nature of Physician Preferences

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  • Alice Chen
  • Darius N. Lakdawalla

Abstract

A longstanding literature highlights the tension between the altruism of physicians and their desire for profit. We develop new implications for how these competing forces determine pricing and utilization. Altruism encourages providers to reduce utilization in response to higher prices, but profit-maximization does the opposite. Rational physicians behave more altruistically when treating poorer patients or those facing higher medical costs, and when foregone profits are lower. These insights help explain observed heterogeneity in pricing dynamics. We show that average price elasticities vary from 0.6 to 1.1 for a given physician, depending on the patient socioeconomic status and out-of-pocket cost burden. This finding has important implications for the design of reimbursement by Medicare Parts A and B, and benefit design within Part D.

Suggested Citation

  • Alice Chen & Darius N. Lakdawalla, 2016. "Saving Lives or Saving Money? Understanding the Dual Nature of Physician Preferences," NBER Working Papers 21930, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21930
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    References listed on IDEAS

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    3. Mark Pauly, 1980. "Appendix to "Doctors and Their Workshops: Economic Models of Physician Behavior"," NBER Chapters,in: Doctors and Their Workshops: Economic Models of Physician Behavior, pages 119-122 National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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