Physician moral hazard and quality of care: experimental evidence from South Africa

Information asymmetries are ubiquitous in health, and they create many challenges related to provider behaviour. One particular problem, influencing the financing and sustainability of health systems, comes from the fact that providers rarely bear the financial consequences of their treatment recommendations (provider moral hazard). As such, they may not exert much effort to recommend the most cost-effective treatment. This behaviour may be reinforced if patients are insured, because doctors who care about their patients’ costs (altruistic provider) will not worry about the consequences of out-of-pocket payments.

In this study, we explore these two potential drivers of provider behaviour in the context of the primary care market in South Africa. We exploit the fact that about 40% of GPs in South Africa are licensed to dispense drugs: they charge a fee for the consultation and an additional fixed charge if they dispense drugs to patients. In other words, when these GPs decide to dispense drugs, because they bear the cost of the drugs given, they face a rationing incentive. Conversely, provider moral hazard is likely to occur when they write a prescription since they do not internalize the costs of drugs prescribed.

We conduct a field experiment to explore the relative and combined effect of this rationing incentive and the patient insurance status on provider performance and prescribing behaviour. On the one hand, we use standardised patients to manipulate the patients’ request for a separate prescription to create an exogenous change in the rationing incentive faced by dispensing GPs. On the other hand, we manipulate the insurance status of the patient to test the prosocial incentives faced by physicians.

Even though patients requested a separate prescriptions, only 60% of the dispensing GPs complied with their request and did not dispense. Hence we use an instrumental variable approach to identify the causal impact of the rationing incentive.

We find strong evidence of provider moral hazard: in the absence of rationing incentives, providers increase the value of drugs prescribed by R80, or 1.2x the cost of drugs dispensed. Provider moral hazard only seems to relate to cost of treatment, as we do not observe a change in effort overall exerted by providers overall, nor in quality of care (correct case management). We do not find supporting evidence for the altruistic provider hypothesis as we cannot detect a difference in the cost of drugs for insured vs. non-insured patients. Conversely, we find that procedural quality of care is higher for insured patients, perhaps reflecting providers’ own (future) profit motives. Our results have direct implications for policy, suggesting that policies requiring physicians to internalise part of the cost of their treatment decisions make more efficient treatment recommendations, not at the expense of quality of care.