Service production and contract choice in primary physician services

Since payment systems for physicians may affect the efficiency of health care service provision, the design of compensation schemes is a major policy concern. According to standard labour economics and agency theory, fee-for-service contracts are likely to induce higher service production than salary contracts and (pure) capitation contracts. Payment systems may also influence service quality and the overall cost control. Despite the obvious policy significance of these issues, the available empirical research is very limited. This paper is an attempt to remedy this situation by addressing the impact of alternative contracts and payment systems on primary care physicians' service supply. The Norwegian primary physician service is an ideal setting for exploring the impact of payment systems. It is a centralised scheme where health services are mostly publicly financed. Until the June 1st 2001, there were two main types of primary care physicians: local government employees remunerated by a fixed salary, and contract physicians mostly financed by fee-for-service payments. We find that physicians with a fee-for-service contract produce a higher number of consultations and other patient contacts than physicians with a fixed salary. This difference is mostly due to longer working hours, but time efficiency is greater as well. Moreover, a part of the difference is due to a selection effect: salaried physicians prefer shorter working hours and prefer to work less intensively. When these and other effects are taken into account, we find that a change from a salary contract to a fee-for-service contract will increase service production by 20-40%.