NCPA - National Center for Policy Analysis

How Your Doctor Is Driving Up Health Care Costs

August 30, 2013

Most of us have had the experience of taking our car to the mechanic for routine maintenance, only to have the mechanic recommend thousands of dollars' worth of repairs. For those of us without expertise in auto repair, this can be frazzling: it's not clear whether we can trust the mechanic because we know it's in his financial interest to perform unnecessary repairs. And indeed, there are some mechanics who take advantage of uninformed consumers to boost their own incomes. The same story applies to doctors, says Sita Slavov, a resident scholar at the American Enterprise Institute.

When a doctor tells us that we need a particular test or procedure, most of us are at an informational disadvantage. Not being medical experts, we can't be sure if the test or procedure is really necessary, or if the doctor is merely looking to enhance her own bottom line. In the latter case, we have what is known as "physician-induced demand," a documented phenomenon that results in overtreatment and contributes to high health care costs.

That's exactly what Erin M. Johnson and M. Marit Rehavi, of the Massachusetts Institute of Technology and the University of British Columbia, respectively, have done in a recent study entitled "Physicians Treating Physicians: Information and Incentives in Childbirth."

  • These two researchers used data on first births that took place in California between 1996 and 2005, and they showed that mothers who are doctors were 9 percent less likely to have unscheduled C-sections (i.e., C-sections that occur after attempting labor) compared to non-physician mothers with similar characteristics.
  • That's consistent with the physician-induced demand hypothesis because, from the provider's perspective, C-sections are typically more profitable than vaginal deliveries.

But not all doctors have a financial incentive to overtreat patients. In particular, some hospitals are owned and operated by health maintenance organization (HMO) insurance companies. At these hospitals, doctors are salaried employees who receive no financial rewards for performing unnecessary C-sections. In fact, HMO-owned hospitals may actually have an incentive to undertreat less-informed patients, as the hospitals themselves bear the full cost of the treatments that they provide.

In coming decades, policymakers will have to take serious steps to bring health care costs under control. As they do, it is important that they not ignore the financial incentives facing both doctors and patients.

Source: Sita Slavov, "How Your Doctor Is Driving Up Health Care Costs," U.S. News & World Report, August 22, 2013.


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