Research Summary
Research Summary
Physician vs. Patient Incentives in Prescription Drug Choice
Description
The market for medical care involves interactions among patients, providers, and the insurers who pay for the care of their enrollees. The division of responsibilities creates scope for agency costs and moral hazard in the physician's treatment choice. I measure the power of insurer-designed incentives, aimed either at the "demand-side" interaction of the patient and physician or the "supply-side" interaction between the physician and insurer, in limiting these costs. Using insurance claims data, I find both sets of tools have roughly equal strength in prompting physicians to prescribe cheaper, often generic alternatives. However, the overall welfare effect proves unclear, as supply-side tools in particular cause patients to quit recommended treatment regimens early and suffer illness relapse at greater rates. As the tools examined--cost-sharing, managed care protocols, and prospective payment--differ in their impact on costs and patient health, a hybrid incentive scheme appears best suited to maximize welfare on both dimensions.