Relatively little is known about the behavior and performance of firms organized as partnerships. In this paper we attempt to fill that gap by developing and testing a model of the effect of alternative compensation arrangements on productive efficiency in medical group practices. The technique employed is maximum likelihood production frontier estimation. We provide a simple behavioral model of the determination of productive efficiency and a new interpretation of the economic measure of technical efficiency. We derive a "behavioral production function" that relates production to individual responses to incentives, and we indicate the impossibility of recovering the parameters of the production technology from observed behavior. Overall, the empirical results indicate that incentives do affect productivity. A larger number of members in a group decreases productivity while greater average experience leads to greater productivity.

We study the effect of public subsidies from the Hill-Burton program on hospital capacity, organization of the hospital industry, and utilization. We estimate that the program accounted for a net increase of over 70,000 beds nationwide and that these effects lasted well beyond twenty years. We also show that differences in the number of hospital beds per capita between high- and low-income counties, rural and urban counties, and the South and the rest of the country fell substantially. We conclude that the program largely achieved its goals, with substantial and long-lasting effects on the U.S. hospital industry.

The Volume-Outcome Effect, Scale Economies, and Learning-by-Doing by Martin Gaynor, Harald Seider and William B. Vogt. Published in volume 95, issue 2, pages 243-247 of American Economic Review, May 2005

The U.S. health-care sector is large and growing—health-care spending in 2011 amounted to $2.7 trillion and 18 percent of GDP. Approximately half of health-care output is allocated via markets. In this paper, we analyze the industrial organization literature on health-care markets, focusing on the impact of competition on price, quality, and treatment decisions for health-care providers and health insurers. We conclude with a discussion of research opportunities for industrial organization economists, including opportunities created by the U.S. Patient Protection and Affordable Care Act.

The nature and normative properties of competition in health care markets have long been the subject of much debate. In this paper we consider what the optimal benchmark is in the presence of moral hazard effects on consumption due to health insurance. Intuitively, it seems that imperfect competition in the health care market may constrain this moral hazard by increasing prices. We show that this intuition cannot be correct if insurance markets are competitive. A competitive insurance market will always produce a contract that leaves consumers at least as well off under lower prices as under higher prices.

In this paper, the authors develop and test a model of the effect of alternative compensation arrangements on productive efficiency in medical group practices. The technique employed is maximum likelihood production frontier estimation. The authors provide a simple behavioral model of the determination of productive efficiency and a new interpretation of the economic measure of technical efficiency. They derive a "behavioral production function" that relates production to individual responses to incentives, and they indicate that the impossibility of recovering the parameters of the production technology from observed behavior. Overall, the empirical results indicate that incentives do affect productivity.

We study health-care provider agency and optimal payments, considering an expensive medication for dialysis patients. Using Medicare claims data we estimate a structural model of treatment decisions, in which providers differ in their altruism and marginal costs, and this heterogeneity is unobservable to the government. In a novel application of nonlinear pricing methods, we empirically characterize the optimal contracts in this environment. The optimal contracts eliminate medically excessive dosages and reduce expenditures, resulting in approximately $300 million in annual gains from better contracting. This approach could be applied to a broad class of problems in health-care payment policy.

We use insurance claims data covering 28% of individuals with employer-sponsored health insurance in the United States to study the variation in health spending on the privately insured, examine the structure of insurer-hospital contracts, and analyze the variation in hospital prices across the nation. Health spending per privately insured beneficiary differs by a factor of three across geographic areas and has a very low correlation with Medicare spending. For the privately insured, half of the spending variation is driven by price variation across regions, and half is driven by quantity variation. Prices vary substantially across regions, across hospitals within regions, and even within hospitals. For example, even for a nearly homogeneous service such as lower-limb magnetic resonance imaging, about a fifth of the total case-level price variation occurs within a hospital in the cross section. Hospital market structure is strongly associated with price levels and contract structure. Prices at monopoly hospitals are 12% higher than those in markets with four or more rivals. Monopoly hospitals also have contracts that load more risk on insurers (e.g., they have more cases with prices set as a share of their charges). In concentrated insurer markets the opposite occurs-hospitals have lower prices and bear more financial risk. Examining the 366 mergers and acquisitions that occurred between 2007 and 2011, we find that prices increased by over 6% when the merging hospitals were geographically close (e.g., 5 miles or less apart), but not when the hospitals were geographically distant (e.g., over 25 miles apart).

Managed care organizations rely on incentives that encourage physicians to limit medical expenditures, but little is known about how physicians respond to these incentives. We address this issue by analyzing the physician incentive contracts in use at a health maintenance organization. By combining knowledge of the incentive contracts with internal company records, we examine how medical expenditures vary with the intensity of the incentive to cut costs. Our investigation leads us to a novel explanation for high‐powered group incentives: such incentives can improve efficiency in the allocation of resources when the allocation process is based on the professional judgment of multiple agents. Our empirical work indicates that medical expenditures at the HMO are 5 percent lower than they would have been in the absence of incentives.

Choice in public services is controversial. We exploit a reform in the English National Health Service to assess the effect of removing constraints on patient choice. We estimate a demand model that explicitly captures the removal of the choice constraints imposed on patients. We find that, post-removal, patients became more responsive to clinical quality. This led to a modest reduction in mortality and a substantial increase in patient welfare. The elasticity of demand faced by hospitals increased substantially post- reform and we find evidence that hospitals responded to the enhanced incentives by improving quality. This suggests greater choice can raise quality.