Working Hard or Hardly Working? The Effects of Pay Structure on Cost of Health Provisions

Abstract

With the cost of healthcare rising in the United States, policy makers and hospital management are trying to find ways to reduce costs associated with the provision and consumption of healthcare. One way to maintain costs within the hospital is examining physician pay. Financial incentives drive physician behavior and can affect the cost of care provided. Specifically, research has been done on the effects and differences between fee-for-service and the capitation method. The research found that different pay structure has different effects on physician behavior and implications on the cost of care given. However, there is a lack of empirical evidence on physicians with no prior exposure to either compensation method. This thesis intends in investigate how costs are affected by fee-for-service and the capitation method on medical students. It addresses the lack of research on the effects of different pay structures on physicians with no prior experience with pay structure. A survey given to medical students at the University of Minnesota evaluated the effects of different pay structures on the cost of care given. Results showed that the pay structure given to the participant significantly influenced the participant’s decisions in choosing a treatment option. Specifically, participants under capitation significantly preferred the lower cost treatment relative to participants under FFS, who preferred the higher cost treatment. The behaviors of medical students coincide with the hypothesized behaviors under each pay structure.