Physician response to fee changes with multiple payers

Abstract

This paper develops a general model of physician behavior with demand inducement encompassing the two benchmark cases of profit maximization and target-income behavior. It is shown that when income effects are absent, physicians maximize profits, and when income effects are very strong, physicians seek a target income. The model is used to derive own and cross-price expressions for the response of physicians to fee changes in the realistic context of more than one payer under the alternative behavior assumptions of profit maximization and target income behavior. The implications for public and private fee policy, and empirical research on physician response to fees, are discussed.