Do Financial Incentives Induce Physicians to Provide More (Unnecessary) Care?

About two years ago, I posted something on my now non-existent Facebook account about how medical tests and treatments, especially those that are elective, are more likely to be offered if doctors are reimbursed well for them. My point was that there was a strong financial incentive to test and treat, even in cases where doing so would confer only little benefit to the patient's health, at best. A bunch of people (mainly physicians) responded on my wall pointing out how misguided I was. It was actually a bit more vociferous than this, but I digress.

Anyway, it turns out that I was right (in this case, NOT shocking). I just came across a great study by Joshua Gottleib, an economics job market candidate from Harvard. His study uses a natural experiment in physician incentives to examine whether payment drives care offered. Specifically, he takes advantage of a large scale policy change by Medicare in 1997. Previously, Medicare created different fee schedules for each of around 300 small geographic areas. This was done because production costs and other realities of providing a given service obviously varied across space. In 1997, they decided to coalesce these regions into 80 larger areas. For some smaller areas, there may have been large payouts for certain services which fell after 1997 because the average payout for their new larger group was lower. For others, it went the other way. In any case, comparing pre and post 1997 gives you a nice experiment as to what would happen to health services provision when payouts are changed for reasons other than local health outcomes or demand for care.

Whether you hold my priors or shared those of my misguided Facebook friends, the results remain astounding. Across all health services, Gottleib finds that "on average, a 2 percent increase in payment rates leads to a 5 percent increase in care provision per patient." Predictably the price response of services with an elective component (such as cataract surgery, colonoscopy and cardiac procedures - don't huff and puff, I said elective COMPONENT!) but not so much for things like dialysis or cancer care, where it is easy to identify who needs it and you need to do it no matter what. Furthermore, in addition to disproportionally adjusting the provision of relative intensive and elective treatments as reimbursements rise, physicians also invest in new technology to do so; this is beautifully illustrated by the examination of reimbursement rates and MRI purchases.

So what's the upshot of all this? Is this a good thing? Probably not. Despite scaling up technology, Gottleib is unable to find any impacts on health outcomes or mortality among cardiac patients (for which he explored more deeply the relationship between payouts and treatment). Furthermore, he asserts that "that changes in physician pro fit margins can explain up to one third of the growth in health spending over recent decades."

Ultimately, some good lessons here. First, if we are interested in bring down costs and increasing health care efficiency, we need to pay for things that actually help maintain and increase health. Second, we can't rely on physicians do be the gatekeepers of rising costs as it is clear that, given incentives, they may not always behave in a way that actually improves health outcomes (thankfully, for cases like fractures, cancer or end-stage renal disease treatment, docs aren't sensitive to prices and do the right thing clinically). Finally, we need to stop universally and blindly lauding the US health care system as a bastion of health care technology if that technology does little to improve outcomes.