Rents for Pills: How Financial Incentives Influence Physician Behavior

Tobias Müller (Bern University of Applied Sciences)

We study the "perfect agent" hypothesis by exploiting a recent regime-change in drug dispensing introducing financial incentives into the drug prescription decisions of physicians in two large Swiss cities. Using detailed physician-, patient- and product-level claims data from a large health insurer, we find that dispensing leads to significant increases in drug spending per patient by up to 15%. Our analysis is indicative that dispensing operates through two main channels: a) physicians increase the number of packages prescribed to patients which is compatible with a package size channel and b) physicians switch to more profitable brands implying a cherry-picking response. On the other hand, our findings suggest that the financial rewards inherent in dispensing do not alter the dosage-decisions of doctors nor do they result in practice style changes. Overall, our analysis shows that dispensing induces physicians to engage in rent-seeking behavior resulting in avoidable costs for the health care system.