Consumer sovereignty and physician agency within episodes of medical care: The role of reputation, incentives, and information

A substantial literature exists suggesting that physicians, facing some threat to their incomes, may lead their patients to consume more medical care than a fully informed patient would. However, any departure from an agency relationship by the physician, irrespective of its motivation, introduces economic inefficiencies into the medical care consumption decision. Models of consumer and physician behavior are developed that suggest that the mechanism that forces physicians to be good agents is damage to their reputations. Reputation is effective only if the consumer\u27s option to search elsewhere for care is meaningful. A search model is developed that analyzes the factors affecting the likelihood that physicians consider patient preferences in treatment decisions. A location model shows how consumer tolerance for departures from preferred care levels affect the practice styles of physicians who make no effort to ascertain the consumer\u27s preferred style of care. The empirical work conducts two tests of the effectiveness of reputation as a constraint on physicians. One examines whether consumer characteristics other than health status are significant in influencing expenditures within outpatient episodes. The other examines the influence of physician compensation. A test of the role of information, analyzing how consumer tolerance changes given changes in the consumer\u27s information, is also conducted. The results suggest that reputation cost may not be an effective constraint upon physicians, at least at the individual consumer level. It appears that physicians practice in fixed styles, rather than as agents. However, the results suggest it is possible that consumers are able to self-select physicians practicing styles that reflect their preferences. More data is needed regarding actual consumer search behavior in medical care markets and how consumers respond to substantial increases in information regarding providers to determine if this informed self-selection is actually occurring