Patients' Free Choice of Physicians Is Not Always Good
22 Pages Posted: 21 May 2019
Date Written: April 23, 2019
We present a model on learning in health care markets. Clinics have a junior physician with low abilities and a senior physician with high abilities. Junior physicians turn senior if they serve sufficiently many patients in the previous period. Clinics choose to allocate patients either randomly to one of the two physicians or let patients choose between the two. We show that in a monopolistic market, social welfare is higher (lower) under the free-choice system than the random-allocation system when the quality difference between junior and senior physician is sufficiently large (small). In a competitive market, patients choose between clinics. If the ability difference between junior and senior physician is sufficiently small or sufficiently large, the clinics choose the allocation system that maximizes social welfare. If the quality difference is intermediate, the random-allocation system maximizes social welfare whereas clinics prefer to implement the free-choice system. This inefficiency arises due to two externalities under the free-choice system. First, the marginal patient making a junior physician turn senior does not internalize this ability benefit. Second, the marginal patient to fill up the capacity of a senior patient does not internalize the dis-utilities caused for those patients that have to wait. The market imperfections may call for a government intervention.
Keywords: Health care markets, learning, quality, social welfare, regulation
JEL Classification: I11, I21, I30
Suggested Citation: Suggested Citation