Reforming Incentive Schemes Under Political Constraints: The Physician Agency

The present Paper investigates political constraints that may impair attempts to reform payment schemes of a given profession. When the good produced (e.g. health care) is imperfectly observable by the payer (e.g. health insurance), asymmetries of information limit the possibility to base payments upon outcome (e.g. quality of care), and payment schemes must be based on some verifiable input (e.g. number of acts). The model is applied, but not restricted to, the physician agency. Political constraints are defined as the necessity to obtain the consent of a large proportion of providers to a given reform of their reward schemes. Second-best efficient reforms, which take into account the welfare cost of such political constraints, induce additional spending due to an excessive quality of outcome. More strikingly, no reform, which imposes to shift away from current payment schemes, may be feasible when practice is highly heterogeneous, and the proportion of producers who need to agree to a reform proposal is large. Since heterogeneity of producers’ practice is a key issue in terms of reforms’ acceptability, we also study whether a menu of contracts may be a way to alleviate the political constraints. In most cases, this requires the introduction of a ‘quality compensation’ scheme that compensates for quality variations across different competing contracts.