Incentivizing Physicians’ Diagnostic Effort and Test with Moral Hazard and Adverse Selection
In this paper, the authors study the following : Doctors with different levels of altruism put in varying amounts of effort to diagnose patients before deciding on tests. The diagnostic effort gives an imperfect idea of the patient's condition, while tests are perfect. Without regulation, doctors don't put in enough diagnostic effort and rely too much on tests. The optimal outcome can be achieved with a payment system that includes:
- Pay-for-performance (P4P) based on correctly treated patients to encourage proper diagnostic effort.
- Capitation to ensure the right testing decisions and doctor participation.
When doctors' altruism levels cannot be observed, a uniform P4P component encourages more altruistic doctors to make more diagnostic efforts. The capitation part should depend on test costs to motivate the optimal testing decisions.
