Reforming incentive schemes under political constraints: the physician agency

In many developed countries attempts to reform physicians payment schemes have failed. To analyze some of the difficulties, this paper studies reforms of payment schemes in situations such as the physician agency, where the quality of the good produced is imperfectly observable by the payer. We first study the situation, common in many countries, where physicians face a single scheme. We identify conditions under which no reform can both obtain the consent of a large proportion of physicians (political constraints) and improve patients welfare. We then study whether a menu of contracts, with or without cross subsidies, may solve the difficulties generated by the heterogeneity of producers practice.