Physician Compensation Supply of Medical Services

Custom-made vs. ready-to-wear treatments

When you are sick and need a doctor, you need hope that you are given the best care possible. Most people assume that doctors will tailor their treatments to the individual patient needs. However, a paper by Frank and Zeckhauser (JHE 2007) explain that this may not be the case. The authors claim that there are four costs which may preclude physicians customizing treatments to individual patients.

  • Communication costs: Whenever a physician prescribes a treatment outside of standard protocol, they will have to explain why they are doing this to the patient and this takes time. With patients armed with more information from direct-to-consumer advertising and the internet, communication costs have increased over time.
  • Cognition costs: The authors claim that using brain power (cognition) has costs and there may be increasing marginal costs of cognition use. Thus, physicians may use heuristics to simplify the decision-making process.
  • Coordination costs: As more and more physicians specialize, communication between physicians is increasingly important. Using standardized, less customized medical treatments makes communication between physicians regarding patient treatment much easier.
  • Capability costs: Some doctors are trained to perform certain techniques. If a superior technique is developed, the physician may still decide to use the “old” technique since they have mastered the “old” technique and do not know how to preform the new, superior technique.

It is likely that customization of treatment varies significantly by treatment. For instance, in my “Operating on Commission” paper I find significant differences in surgery rates based on how physicians are compensated by insurance companies. Since this is a significant medical and financial decision by the doctor, one would expect there to be more customization than in other areas, since the benefits to surgery are so large relative to the costs outlined above.

The authors ennumerate how customization will vary accross patients as follows:

  1. little is known about a patient and their responsiveness to various treatments
  2. treatment is expected to be short-lived
  3. there is little difference in the impact of different treatments on patients

On the other hand, Grand and Zeckhauser look at whether or not there is “norm-following behavior” in the length of office visits and physician prescribing behavior. They use data from the 2004 NAMCS and the Quality Improvement in Depression study. They find that physicians do customize treatment more for chronically ill patients than for patients with acute illnesses. Physicians do tend to spend more time in office visits with new patients, but the time spent with the patients does not vary by illness type or severity. Thus, the administrative and communication costs that new patients impose and not medical necessity seem to be dictating how the length of a visit varies. These results are similar to the ones found in Glied and Zivin (2002).

Thus, the authors conclude that some customization of prescribing practices and prescribing behavior does occur, but this behavior is not based on clinical factors.