Saving Lives or Saving Money? Understanding the Dual Nature of Physician Preferences

A longstanding literature has highlighted the tension between the altruism of physicians and their desire for profit. This paper develops new implications for how these competing forces drive pricing and utilization in healthcare markets. Altruism dictates that providers reduce utilization in response to higher prices, but profit-maximization does the opposite. Rational physicians will behave more altruistically when treating poorer, more vulnerable patients, and when the financial costs of altruism are lower. These insights help explain the observed heterogeneity in pricing dynamics across different healthcare markets. We empirically test the implications of our model by utilizing two exogenous shocks in Medicare price setting policies. Our results indicate that patient income, out-of-pocket costs, and profitability alone explain up to one-quarter of the variation in price elasticities. Finally, we demonstrate that uniform policy changes in reimbursement or patient cost-sharing may lead to unintended consequences. JEL: I11, I12, I18 † University of Southern California, Sol Price School of Public Policy, 635 Downey Way, Los Angeles, CA 90089-3333 Tel: (213) 821-1763. Email: [email protected]. ‡ University of Southern California, School of Pharmacy and Sol Price School of Public Policy; and NBER. * We gratefully acknowledge comments from participants at the BU-Harvard-MIT Health Seminar, the NBER Health Care Summer Institute, the Midwest Health Economics Seminar, and the USC CESRSchaeffer Brown Bag. Financial support provided by the National Institute on Aging of the National Institutes of Health under award number P01AG033559. 1