ABSTRACT
Since Coase's landmark paper on the theory of the firm, the economics profession has devoted increasing attention to the internal workings of organizations. An important strand of this literature is the empirical study of incentive systems. Physicians are a particularly important group for economists to study because their decisions drive most health care expenditures and because their response to incentives is complex-a mixture of income maximizing self-interest and non-pecuniary norms regarding appropriate medical care. A number of recent empirical studies find that physician practice style is influenced by explicit and implicit financial incentives. If higher quality medical care requires, on average, more money, and if physicians are responsive to financial incentives, one would expect the cost-containment incentives that characterize managed care to degrade medical outcomes. Competition for physicians shapes the competition for customers because enrollees are willing to pay more for plans offering broader provider networks.
