Competition, Altruism, and Provider Payment

Health care policymakers in many countries seek to use incentives and competition to spur efficiency. One important challenge is to mitigate the sacrifice of social solidarity that such reforms entail, because strong incentives promote risk selection. This paper argues conceptually and presents simulations revealing how competition, altruism, and payment incentives affect efficiency and equity of treatment. The focus is how to prevent or minimize incentives for quality distortions designed to attract profitable and deter unprofitable patients. The primary result is that strong incentives from competition for patients and financial rewards for cost control can exacerbate selection distortions and compromise social solidarity. By contrast, insurer and/or provider altruism, manifest as an innate concern for patient welfare regardless of profits, tends to mitigate selection, allowing society to reap the efficiency benefits of competition and incentives without sacrificing social solidarity