Financial incentives and physician prescription behavior: Evidence from dispensing regulations

In many healthcare markets, physicians can respond to changes in reimbursement schemes by changing the volume (volume response) and the composition of services provided (substitution response). In this paper, we examine the relative importance of the volume and substitution response in the context of physician drug dispensing. We use data on the market for ambulatory care in Switzerland in which different dispensing regimes (banned/allowed) co-exist at the regional level. Using doubly-robust regression and semiparametric quantile treatment effect estimators, we find that dispensing increases drug costs by 52% for general practitioners and 56% for medical specialists. This increase is mainly due to a volume increase of about 56% for general practitioners and 74% for specialists. The substitution response is negative on average (around −4% for general practitioners and −20% for specialists), but not significantly different from zero for large parts of the distribution. In other words, drug dispensing causes physicians to sell more drugs but not to substitute towards more expensive drugs. In addition, our results reveal substantial effect heterogeneity along the distribution