Stochastic technology, production organization and costs

Using a model including patients, physicians, insurers and uncertain diagnostic technology, the optimal cesarean rate is derived from preferences, technology and the incidence rate, when the choice of insured patients is constrained only by technology. Uncertain diagnosis produces unnecessary cesareans and unsafe vaginal births. Technical progress can lead to more cesareans and higher costs. Joint production of goods and bads and collective payments require incentive compatible pricing schemes, different from RBRVS. Equilibrium outcomes of HMOs and free-for-service organizations are identical. However, implementable incentive schemes involve additional costs. Efficiency requires insurers, and not providers, to be liable for malpractice claims.