Do Physicians Respond to Financial Incentives?

Interesting letter to the editor from Dr. James R. Fowler in the SLTrib on last Saturday. Here's a snippet:

In 40 years of practicing medicine, neither I, nor any physician I have known, has ever based a patient's treatment on financial remuneration. It is an insult to me and the entire medical profession to imply that physicians base their treatments on anything but what is best for their patients.

I'm going to post a response, but first I want to put a big caveat in. I don't know Dr. Fowler, and I probably don't know any of the doctors that he's referring to. It's entirely possible that the first sentence in the excerpt above is the literal truth.

But the general statement that physicians don't respond to financial remuneration is not supported by the data. Health economists have done a lot of work studying this question, and the broad picture is that financial incentives do seem to influence physicians' choices regarding patient care.

Here are a couple of examples:

In the 1989 New England Journal of Medicine, Alan Hillman, Mark Pauly and Joseph Kerstein compared physicians who were paid either salaries or on "capitation" to those paid by fee-for-service. Salaries mean that doctor pay doesn't vary at all with how they provide care to patients. Capitation means that doctors are paid a fixed amount per patient, regardless of the level of care provided to that patient. Fee-for-service means that the doctor gets paid more when the patient "buys" more health-care. The results? Patients of salary or capitation docs had a lower rate of hospitalization than patients of fee-for-service doctors.

In 1999, Jon Gruber, John Kim, and Dina Mayzlin reported (in the Journal of Health Economics) a study of rates of Caesarian Sections for childbirth. Medicaid, it turns out, offers much much lower reimbursement rates for C-Sections (relative to normal childbirth) than does private insurance. That is, a doc faced with a Medicaid patient might get $130 more for doing a C-Section than for a normal childbirth. But that same doc with a patient covered by private insurance might get $550 more from a C-Section. Rates of C-Section are much lower for Medicaid patients than for the regular population, and this remains true even after controlling (statistically) for factors such as breech, fetal distress and maternal distress. Further, the authors show that changes in the Medicaid differential (say, from to $130 to $400) are associated with changes in the relative rates of C-Sections in the Medicaid and private-insurance populations.

These are just two studies out of dozens. I could go on and on.

Two caveats are important here: First, evidence like this doesn't mean that all doctors make all decisions in response to financial incentives. It's likely that there are many physicians, like Dr. Fowler, who don't respond to financial incentives. But the evidence suggests that at least some docs respond to financial incentives at least some of the time. And this means that that policy makers should think about physicians' incentives as part of the broader health-care-reform picture.

Second, it remains unclear what the "right" level of care is. That is, the second study shows that we get more C-Sections under private insurance than under Medicaid, and that this is related to reimbursements. But do we have too many C-Sections under private insurance, or too few under Medicaid? It's simply not clear from studies like this what the right level of care is, so it's hard to determine the right way to structure physician incentives.

All this commentary so far has been directed at the first sentence of Dr. Fowler's snippet, so let me comment a bit on the second. Is it an insult to doctors to suggest that they, too, are at times influenced by financial considerations? Maybe so, but to me this just means that doctors are people too.