Physician Response to Prices of Other Physicians: Evidence from a Field Experiment

Recent efforts to increase price transparency for American consumers of health care have largely failed to produce savings. Medical-field research on physician-side price transparency, however, has shown promise for savings but suffers from pervasive methodological problems. I perform a field experiment that addresses these measurement difficulties while studying an area that has received little attention: physician referrals. Working with a group of medical practices linked as an Independent Practice Association (IPA), I randomly selected primary care practices to receive a list of average costs -- that is, prices -- for new referrals to six ophthalmology practices that were part of the IPA's provider network. These practices handled the bulk of the IPA's ophthalmology patients and represented substitute providers. Using the IPA's administrative data on referrals, I find that during the first two months following the distribution of the price list, the treatment group primary care physicians (PCPs) increased referral share towards the least expensive ophthalmology practice by 147 percent. These referrals were allocated away from the most expensive practice and those not listed on the report. These effects were only found, however, for patients for whom the PCPs had a cost reduction incentive. The large initial effect dissipated over the following four months. For patients with a limited financial interest for the PCPs, I find little evidence of a treatment response. These contrasting results suggest the PCPs were influenced by cost reduction motives and provide more evidence of the potential for savings from physician-side price transparency.