Agency and Financial Incentives
Today we focus on the role of financial incentives in the context of physician agency problems. This literature examines whether and how physicians respond to changes in payment when making treatment decisions. Financial incentives are a natural starting point for studying agency because they provide clear, measurable variation in the marginal returns to different clinical actions. At the same time, isolating causal effects is challenging, as payment changes often coincide with broader policy reforms or shifts in patient composition.
Early and influential work exploits settings in which physicians directly profit from specific treatment choices. For example, Iizuka (2012) studies prescribing behavior in Japan, where physicians both prescribe and dispense drugs, creating sharp financial incentives to favor branded pharmaceuticals over generics. The paper provides clean evidence that physicians respond to these incentives, highlighting how agency can distort treatment choices even in the absence of explicit patient demand.
More recent work leverages quasi-experimental variation in reimbursement rates to study physician responses in the U.S. healthcare system. Clemens and Gottlieb (2014) exploits plausibly exogenous changes in Medicare physician fees to estimate supply responses, showing that physicians adjust both the volume and intensity of care in response to payment changes. Importantly, the paper also examines downstream effects on patient health, illustrating how financial incentives can influence not only utilization but outcomes.
Together, these studies demonstrate that physicians respond to financial incentives in systematic ways, but also raise broader questions about the effectiveness and limits of payment-based policy tools. These questions motivate later discussions of non-financial incentives and organizational constraints.
Potential papers for presentation today include:
- Iizuka (2012) — physician dispensing incentives and prescribing behavior
- Clemens and Gottlieb (2014) — reimbursement changes and physician treatment responses
- Ho and Pakes (2014) — financial incentives, hospital choice, and physician behavior