David Bardey, Universidad de los Andes – CEDE

Paper: Incentivizing Physicians’ Diagnostic Effort and Test under Moral Hazard and Adverse Selection

Abstract: Physicians differing in their degree of altruism exert first a diagnostic effort before decid-
ing whether to test patients to determine the most appropriate treatment. The diagnostic effort generates an imperfect private signal of the patient’s type, while the test is perfect. At the laissez-faire, physicians exert insufficient diagnostic effort and rely excessively on testing. The first-best allocation (where the degree of altruism is observable) can be decentralized by a payment scheme with both a capitation part (to ensure both the correct testing decision and the participation of physicians) and a pay-for-performance part based on the number of correctly treated patients. When altruism is non observable, the second best contract with capitation and pay-for-performance has to be pooling, an instance of non-responsiveness. This second-best optimal contract induces more altruistic physicians to exert greater diagnostic effort. The capitation part has to be conditioned on the test
cost in order to induce the second-best optimal testing decision.