Physician Induced Demand and Financial Incentives

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Abstract
This paper analyzes how physicians adapt their provision of medical services in response to a change in financial incentives. Exploiting a plausibly exogenous and large-scale reform to the reimbursement system, we find that physicians are not immune to monetary incentives in a fee-for-service system. First, we isolate two response channels: substitution and volume expansion. We find that providers increase (decrease) the volume of services that became relatively more (less) attractive. The results vary gradually by the extent of the income loss. Further, physicians increase consultations if they lose a substantial share of their revenue. Second, in terms of total healthcare spending, adjustments in overall supply are the main driver of aggregate cost changes. On the other hand, substitution is of limited importance for aggregate costs. This may open a promising avenue for value-based payment. Joint paper with Tamara Bischof.

Link to paper.