Does Physician Compensation Impact Procedure Choice and Patient Health?

Diane Alexander, Princeton University

I find that compensation structure impacts a doctor's decision to perform a Cesarean section (C-section). Using Medicaid reimbursement and vital statistics data, I find that fee-for-service doctors respond to an increase in the relative reimbursement for C-sections by increasing their use of the procedure. These incentives are not passed through to salaried doctors -- their C-section use remains constant at the same lower rate as fee-for-service doctors who are paid the same for both procedures. For fee-for-service doctors who face pay differentials, however, the increase in C-section use due to increases in the pay difference is associated with fewer infant deaths. This paper demonstrates the difficulty in lowering procedure use while holding patient health constant. Reforms that alter financial incentives indiscriminately may have unintended negative consequences.