Date of Original Version

1-2012

Type

Working Paper

Rights Management

All Rights Reserved

Abstract or Description

Excessive diagnostic tests have long been viewed as one major aspect of the inefficiency in the healthcare system and are often attributed to the fee-for-service payment model. In this study, we investigate the underlying operational and economic drives behind physicians' test-ordering behavior in an outpatient setting. We model and analyze the strategic interaction between a single physician and a group of patients with health insurance coverage. We then investigate the effect of different service settings. First, setting a low reimbursement ceiling alone cannot eliminate overtesting. Second, the joint effect of misdiagnosis concerns and insurance coverage can lead to both overtesting and undertesting, which differs from popular beliefs about the effect of misdiagnosis concerns. Third, patient heterogeneity can further encourage physicians to overtest in order to cherry-pick patients. Fourth, we show that our main insights carry over when the physician can increase the service quality through reading and analyzing the results from diagnostic tests. Last, we consider asymmetric information in physician type and find that physicians' signaling efforts can lead to more salient overtesting behavior, especially when technology advancements flatten out differentiation among physicians.

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