Moral Hazard And Risk Spreading in Medical Partnerships

by Martin Gaynor, Paul Gertler

Purchase Print Copy

 FormatList Price
Add to Cart Paperback68 pages Free

Partnerships provide a classic example of the tradeoff between risk spreading and moral hazard. The degree to which firms choose to spread risk and sacrifice efficiency incentives depends upon risk preferences, for which data are typically unavailable. The authors use a unique data set on medical group practice to investigate the degree to which firms which report more risk aversion have greater departures from first-best organizational incentive structures and the consequences for physician productivity. Increased risk aversion leads to compensation arrangements which spread more risk through diminished incentives. The authors also find that compensation arrangements that have greater degrees of revenue sharing across physicians significantly reduce each physicians's productivity, whereas reductions in group size significantly increase productivity. The estimated efficiency loss associated with risk aversion accounts for over ten percent of gross income, comparing the most risk averse to the least risk averse physicians in the sample. The authors use the results to show that changing the way physicians are paid from fee-for-service to capitation will dramatically reduce physician productivity.

This report is part of the RAND Corporation draft series. The unrestricted draft was a product of the RAND Corporation from 1993 to 2003 that represented preliminary or prepublication versions of other more formal RAND products for distribution to appropriate external audiences. The draft could be considered similar to an academic discussion paper. Although unrestricted drafts had been approved for circulation, they were not usually formally edited or peer reviewed.

The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.