Financial incentives in healthcare market

Abstract

This thesis studies from various aspects how individual decision-makers may take into account financial incentives that regulators would rather usually ignore instead in the healthcare market.

The first chapter examines how the provision of health care is affected by physicians' financial incentives. China introduced a national policy to regulate hospital drug prices in 2012 aiming to alleviate the dependence of hospital operations on drug sales. Since then, the markup for drugs prescribed and dispensed in public hospitals has dropped from 15% to 0. We use patient-level data from a hospital in Western China to study the effect of this Zero Markup Drug Policy. We investigate in this paper how the financial incentives have stimulated healthcare providers to respond to and survive this structural change. We first identify a substitution pattern from drug-based treatments to using more medical procedures post-policy. Such substitution has not only promoted the adoption of advanced technologies and expanded treatment capacity, but also improved the treatment outcomes in patient care.

The second chapter investigates patient demand for health care and analyzes how it responds to financial incentives. Primary care is widely recognized as an effective method for providing accessible and affordable healthcare to all. Enhancing its utilization among disadvantaged populations is particularly valuable in promoting healthcare equality and alleviating poverty. In this study, we use a structural approach to investigate patients' decision-making processes regarding primary care utilization, with a focus on health attitudes, which measure how patients value the potential of health management in maintaining their current status. We analyze health insurance claim data from a rural county in China and find that disadvantaged populations tend to under-utilize primary care due to inadequate attitudes towards health management, even when primary care services are beneficial and accessible. Furthermore, current insurance policies aimed at assisting disadvantaged patients focus primarily on hospitalization, inadvertently incentivizing them to use less primary care. This leads to increased healthcare costs and negatively impacts patient welfare. Our counterfactual analysis suggests that reducing the cost-sharing of primary care may be the most cost-effective strategy for assisting disadvantaged populations compared to other policies focused on altering health attitudes and travel costs.

The third chapter focuses on organizational structure and studies how the hierarchy in medical teams can ease incentive conflict and thus affect performance. We exploit an exogenous policy in China that mandated a hierarchical structure in medical teams, in which the leader coordinates resources among members and supervises their work, to examine how it affects treatment outcomes and efficiency of patient care. Using inpatient records and personnel data from a public hospital in Western China, we find that the supervision of a leader leads to an economically significant decrease in patients' medical spending without compromising their well-being. Moreover, our findings suggest that the improvement in performance is achieved by the role of a leader in easing incentive conflict between physicians and regulators. We further document evidence that more experienced leaders can coordinate resources better and improve efficiency by reducing labor input in patient care.