Physician vs. Patient Incentives in Prescription Drug Choice

Revise and resubmit, American Economic Journal: Economic Policy

Abstract: In response to rising health spending, public and private insurers use two mechanisms to direct spending toward more valuable treatments: “demand-side” incentives, which impose costs on the patient to limit moral hazard, and “supply-side” incentives, which adjust the physician’s compensation to discourage spending. Using variation in patients’ and physicians’ exposure to incentives, I identify important differences in cost and health outcomes under these two mechanisms. Demand-side cost-sharing discourages both initial treatment and later adherence. Payment reforms drive physicians to substitute drug care and specialist referrals for office visits. I discuss the implications of these outcomes for optimal insurance design.