Moral Hazard and Economies of Scope in Physician Ownership of Complementary Medical Services

41 Pages Posted: 9 Nov 2013 Last revised: 14 Aug 2022

See all articles by Brian Chen

Brian Chen

University of South Carolina

Paul J. Gertler

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Chuh-Yuh Yang

Kaohsiung Medical University

Date Written: November 2013

Abstract

When physicians own complementary medical service facilities such as clinical laboratories and imaging centers, they gain financially by referring patients to these service entities. This situation creates an incentive for the physician to exploit the consumers' trust by recommending more services than they would demand under full information. This moral hazard cost, however, may be offset by gains in economies of scope if the complementary services are integrated into the physician's practice. We assess the extent of moral hazard and economies of scope using data from Taiwan, which introduced a "separating" policy, similar to the Stark Law in the US, that restricts physician ownership of pharmacies unless they are fully integrated into the physician's practice. We find that physicians who own pharmacies prescribe 7.6% more drugs than those who do not own pharmacies. Overall, we find no evidence of economies of scope from integration in the treatment of patients with acute respiratory infections, diabetes, or hypertension. Overall the separating policy was ineffective at controlling drug costs as a large number of physicians choose to integrate pharmacies into their practices in order to become exempt from the policy.

Suggested Citation

Chen, Brian and Gertler, Paul J. and Yang, Chuh-Yuh, Moral Hazard and Economies of Scope in Physician Ownership of Complementary Medical Services (November 2013). NBER Working Paper No. w19622, Available at SSRN: https://ssrn.com/abstract=2352139

Brian Chen (Contact Author)

University of South Carolina ( email )

701 Main Street
Columbia, SC 29208
United States

Paul J. Gertler

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-1418 (Phone)
510-642-4700 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Chuh-Yuh Yang

Kaohsiung Medical University ( email )

No. 100, Shíquán 1st Rd
Kaohsiung City, Sanmin District
Taiwan

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