Wrong Kind Of Incentives

Pick any economics textbook and they will tell you about how people are motivated by incentives. These are what guide the economy and ensure it functions. As Adam Smith famously said, we get food from butchers and bakers not through charity but because they have an incentive to sell and make a profit. But what happens when incentives lead people in a negative direction? What if people have an incentive not to help others but make a profit from them? One common problem known to health economists is known as supplier induced demand and occurs when doctors put making money ahead of helping their patients.

The relationship between a doctor and their patient is an unbalanced one. Most patients know little about the state of their health whereas the doctor has spent years studying and seen hundreds of cases. The doctor is in a position of authority over the patient who generally has little option but to listen to the advice given. In fact commandments would be a better word than advice. It is easy to be intimidated when entering a doctor’s office and especially when you are not feeling up to strength. It is from this unbalance of power and asymmetric information (where the doctor knows more about the patients’ health than the patient does) that problems arise. Doctors are in such a position that patients will more or less do as they are told. This power can be used to help the patients, but it can also be exploited to earn the doctor more money.

Doctors are usually (in the case of General Practitioners GPs) paid per visit. This is usually done for convenience as other forms of payments are too difficult to measure. It is impossible to measure in advance what the illness is or the state of the patient so payment based on condition is unfeasible. Nor is it possible to pay by results as this depends hugely on the initial health of the patient. People can get better or worse despite the actions of the doctor or because of them and it’s impossible to tell the two apart. Payment per visit encourages doctors to be as fast as possible in getting patients in and out, though this haste may cause them to miss important signs. Or they may encourage patients to return for additional checkups even if they are not necessary. Other proposals include giving doctors a fixed wage regardless of work done, which solves the previous problem but gives doctors little incentive to be efficient.

Thus doctors have an incentive to increase the number of times a patient visits and the patient lacks enough information to know how many times they should visit. This means a doctor could induce a patient to return for several visits even if they are unnecessary. This is known as Supplier Induced Demand (SID). It is one of the clearest examples of when incentives can push people in the wrong direction, so that they make money off people rather than helping them.

Unfortunately it is impossible to measure how widespread a practice this is. Seeing as it is based on lack of information, it has proven impossible for researchers to measure its level among the medical profession. There is no way of comparing how many visits a patient “should” have had with how many they actually did. I had to write an essay on it for university and found it extremely difficult to find any definitive evidence either which way. The most common method is to compare the number of doctors with the number of visits (the implication being that more competition forces doctors to get more out of their patients), though this is a very unsatisfactory and crude mean. There are a range of correlation versus causation problems as well as the problem that some doctors who exploit their patients could be cancelled out by doctors who do not if only national averages are examined. Thus Supplier Induced Demand remains a theory that can be neither proven nor disproven.

The most compelling evidence comes from a study by Gruber & Ownings who studied the level of caesarean sections. Since the 1970s there has been a huge rise in the number of caesarean sections performed, jumping from 5% of all births in 1970 to 25% in 1995. However, there is still debate over whether it is a much better procedure than natural birth or not. However, doctors get paid roughly 40% for doing a caesarean section and they take less time. Unlike natural births they can be scheduled, which makes them far more convenient for doctors. It is postulated that the declining fertility rate since the 70s caused doctors induce patients to switch to caesarean sections in order to maintain their income. The study found that a 10% decline in the fertility rate lead to a 1% rise in use of caesarean sections. This implies there is some degree of supplier induced demand, but it is not conclusive or overwhelming.

Regardless of the difficulty of empirically proving it, it is clear that there are a wide range of cases where people have the wrong sort of incentives. Taxis are paid by how long they take, giving them an incentive to go slowly or take the long way. Lawyers paid by the hour have little incentive to be fast or efficient. In fact this problem relates to all who are paid by the hour. If the wage is variable it can be exploitative, whereas if it is fixed, it can be inefficient. Wherever the seller has more information than the consumer (which is almost everywhere), they have the incentive to push them towards buying the product that makes them the most money rather than the one that suits them best. Buying electronics are a good example of this. People are easily overwhelmed by the range of products and the technical details. So they must rely on the store staff for guidance, who in turn have an incentive to make money first and help people second.

Capitalism can push people in the right direction, but it can also lead them astray. As the above post illustrates, it is not as simple as socialists and libertarians pretend. Any system will have its flaws so there are no easy ways out. The best we can do is be fully aware and introduce checks against the worst flaws. Mitigating abuses is not as dramatic as wiping them out, but sometimes sensible trumps dramatic.


Filed under Economics

3 responses to “Wrong Kind Of Incentives

  1. I shall reply to this from my laptop later. You know that I’m a doctor but when I have computer access I will put forward my two cents.

  2. C-section rates have increased for many reasons… I will highlight three
    1) There is a reduced risk for complications during a c-section birth and thus subsequent litigation. OB/GYN doctors have the highest premiums for medical malpractice insurance, because they can be sued up to 21 years after the birth.

    2) Maternal request. Mothers are i) fearful of labour pain; ii) some desire not to have vaginal injury (don’t take this the wrong way, but some women believe they become ‘loose’ after vaginal delivery) and iii) they can plan a date for elective surgery/delivery and thus prefer a C-section.

    3) Improvement in technology has enable doctors and midwives to recognize earlier when a foetus is in distress during the hours of labour and must be extracted post haste. Such advances have allowed for quick decisions to be made in going for a surgical delivery.

    Certainly there are the few doctors who would go to c-section for financial reasons…but there is risk in every procedure and such decisions I don’t think are taken lightly.

    And a footnote on fertility…..I can’t comment on the association of reduced fertility rates and increased c-section rates. However when it comes to the fertility of women, the decline seen is a function of several factors: increased income, migration from rural to urban environments, more women becoming educated and entering the workforce and rising standard of living.

    Lawyers on the other hand are a whole other kettle of fish (who by the way tend to end up as our legislators and you seem keen to entrust the reins of govt in their hands).

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