The effect of fee-for-service, capitation, and mixed payment systems on physicians’ behavior: Experimental evidence

In recent health care reforms, fee-for-service (FFS) to remunerate physicians’ medical service provision has been replaced by capitation (CAP) or mixed payment systems. The latter, combining FFS and CAP, is advocated in the theoretical health economics literature as optimal levels of quantity of medical services can be achieved. Moreover, incentives to over-serve and under-serve patients inherent in FFS and CAP, respectively, are mitigated in mixed systems. Empirical evidence on how physicians actually respond to mixed payment systems and whether adverse effects for patients’ health due to over- and under-provision are mitigated is rather scarce. The reason might be that causal relationships are difficult to uncover in observational studies. Until now, it is thus an unresolved issue whether patients’ health benefit can be improved as physicians’ behavioral response to incentives from mixed payment systems is not well understood.

 In our experimental study, we compare physicians’ behavior in FFS, CAP and mixed incentives under controlled experimental conditions allowing for real ceteris paribus variations. At a within-subject level, we systematically analyze how physicians behave in non-blended FFS- and CAP-systems and mixed payment systems. All payment systems are incentive compatible for individual physicians. Between-subjects we investigate physicians’ behavior under different levels of supply-side cost sharing. Our laboratory experiment captures a medical decision-making context. In particular, subjects in the role of physicians decide on the quantity of medical services for different types of patients. Patient characteristics are systematically varied and kept constant across payment systems. Real patients outside the experimental lab gain a benefit from subjects’ decisions in the lab.

 Behavioral results indicate that physicians react to financial incentives from FFS, CAP and mixed payment systems. In particular, we find that over-provision of medical services under FFS and under-provision in CAP can, in fact, be reduced by introducing mixed payment systems. This behavior implies a higher patients’ health benefit in mixed systems. An increase in supply-side cost-sharing in mixed FFS-system leads to further reductions in over-provision. On the contrary, increasing fees in mixed CAP-systems implies less under-provision of medical services. Behavioral results in mixed payment systems also imply higher health benefit-remuneration ratios than the respective FFS and CAP systems. Some further interesting insights for the design of physician payment systems are provided.