Cost Incentives for Doctors: A Double-Edged Sword
CentER Discussion Paper No. 2011-105
31 Pages Posted: 21 Sep 2011 Last revised: 15 Aug 2012
Date Written: September 15, 2011
If doctors take the costs of treatment into account when prescribing medication, their objectives differ from their patients' objectives because the patients are insured. This misalignment of interests hampers communication between patient and doctor. Giving cost incentives to doctors increases welfare if (i) the doctor's examination technology is sufficiently good or (ii) (marginal) costs of treatment are high enough. If the planner can costlessly choose the extent to which doctors take costs into account, he will opt for less than 100%. Optimal health care systems should implement different degrees of cost incentives depending on type of disease and/or doctor.
Keywords: cheap talk, communication, health insurance, market design
JEL Classification: D82, D83, I10
Suggested Citation: Suggested Citation