How Changes in Payment Schemes Influence Provision Behavior

When implementing a payment reform, policy makers face the challenge of assessing the effects on health care providers’ behavior. Empirical evidence most often relies on field studies, register- or survey data characterized by the absence of a control group. In this paper, we conduct a controlled laboratory experiment to assess the effect of a change in the payment system using the parameters of Hennig-Schmidt, Selten, and Wiesen (2011). We focus on the two payment systems fee-forservice (ffs) and capitation (cap). Participants are either practicing medical doctors or medical students. They are confronted with two different payment mechanisms, transitioning either from ffs to cap or vice versa. We also analyze whether the effect of financial incentives is dependent on cultural context by comparing German and Chinese medical students’ provision behavior. In line with previous evidence, both doctors and medical students provide fewer medical services under cap than under ffs. Patient benefit deviates significantly from the patient optimum under both payment systems, even though subjects do not maximize their profits. Whether cap or ffs is beneficial for the patient depends on the patient type. We find that doctors provide less patient benefit and less frequently choose benefit-maximizing treatments. We find that the sequence of payment schemes affects physician provision behavior. Under cap, more benefit is provided when cap follows ffs as compared to the opposite order. Under ffs, we observe no such effect. The interpretation is that provider behavior under a payment schemes can depend not only on the current payment scheme, but also on the payment scheme that was implemented in the past. Comparing medical students from Germany and China, we do not find any difference in behaviour under the same payment scheme.