Financial Incentives and Long-Run Health Sector Capacity

We propose to study an under-appreciated connection between short-run care provision and long-run investments in human capital. The basic idea is straightforward and draws on classic human capital theory (Ben-Porath, 1967). Reimbursement changes have unambiguous implications for the long-run returns to medical practice: higher reimbursements increase those returns. Theory thus has unambiguous predictions that higher reimbursement rates should increase entry into medical practice. Investments in long-run capacity will similarly exhibit positive elasticities under modest assumptions. The insight we propose to analyze is that investments in a physician’s human capital, and more generally in the future of their practice, require time. Reductions in such investments
can thus lead to increases in time spent on revenue-generating patient care over the short-run. A fee cut that generates responses of this form would thus have very different implications for the short- and long-run availability of the physician services in question.
We propose to develop the theory underlying this idea using a multi-period model of physician investment decisions. A two-period version of the model we propose to develop delivers several of the intuitions of interest. The model’s key assumption is that working in period 2 requires a physician to spend time on continuing education, patient recruitment, or other investments in her practice during period 1. Absent this investment effort, she retires and plays golf in period 2. In period 1, a decline in investment activities will thus tend to be associated with an increase in care provision. Declines in reimbursement rates may thus increase short-run care provision even when they reduce long-run care-giving capacity through entry and exit margins.
We propose to test this hypothesis using a large Medicare fee change that significantly reduced payments for surgical services and increased payments for non-surgical care. We will examine data from the Community Tracking Study that report physicians’ patient care hours along with investment activity, such as recruiting new patients and maintaining board certification. We will also look at the extensive margin decision of which specialty to choose, and whether physicians continue to practice, by age. The private sector amplified Medicare’s price change (Clemens and Gottlieb, 2017), which could strengthen the effects on physicians’ incomes and hence behavior.