Incentive-Compatible Reimbursement Schemes for Physicians

Physicians choose capacity before demand materializes; actual demand may be higher or lower than capacity. If a physician's capacity exceeds demand, she may have an incentive to overtreat, i.e., she may provide unnecessary treatments to use up idle capacity. By contrast, with excess demand she may undertreat, i.e., she may not provide necessary treatments because other activities are financially more attractive. We first show that simple fee-for-service reimbursement schemes do not provide proper incentives for all demand realizations. If, however, insurers use fee-for-service schemes with quantity restrictions, they solve the fraudulentphysician problem.