Thomas G. McGuire

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This paper develops a model in which physicians choose the level of services to be provided to their patients. We show that if physicians undervalue benefits to patients relative to hospital profits, prospective payment, a system in which hospitals receive a payment dependent on the diagnosis-related group within which a patient falls, can lead to too few(More)
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(More)
In response to a change in reimbursement incentives, hospitals may change the intensity of services provided to a given set of patients, change the type (or severity) of patients they see, or change their market share. Each of these three responses, which we define as a moral hazard effect, a selection effect, and a practice-style effect, can influence(More)
In the federal Medicare program, contracting health maintenance organizations (HMOs) are paid on a capitated basis. There has long been concern that an "adverse selection" of risks remain in the traditional fee-for-service (FFS) sector, since beneficiaries with low costs may leave the FFS sector and join the HMOs. The distortion associated with this form of(More)
1547 * Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215 (e-mail: I am grateful for !nancial support of the Sloan Foundation (2011-5-23 ECON) and the NSF (SES-1357705) and for in kind support from the L. Davis Institute for Health Economics at the Wharton School of the University of Pennsylvania where I am an(More)
Demand-side cost sharing and the supply-side reimbursement system provide two separate instruments that can be used to influence the quantity of health services consumed. For risk-averse consumers, optimal payment systems--pairs of insurance and reimbursement plans--are characterized by conflict rather than consensus between patient and provider about the(More)
Health plans paid by capitation have an incentive to distort the quality of services they offer to attract profitable and to deter unprofitable enrollees. We characterize plans' rationing as a "shadow price" on access to various areas of care and show how the profit maximizing shadow price depends on the dispersion in health costs, individuals' forecasts of(More)
Risk adjustment refers to the practice of paying health plans a premium per person (or per family) based on a formula using risk adjusters, such as age or gender, and weights on those adjusters. One role of risk adjustment is to make sure plans have an incentive to accept all potential enrollees. Another role, at least as important in our view, is to lead(More)