Quality incentives for GPs in a regulated market

This paper analyses whether GPs in a capitation system have incentives to provide quality even though health is a credence good. A model is developed where the quality of the service varies due to inherent differences between the GPs and rational patients make choices based on the outcome of treatment. We find that it is difficult to provide appropriate incentives since the search activity of patients offsets direct effects of a change in reimbursement. Variation in the inherent ability of the GPs is good since it increases the search activity of the patients and the optimal reimbursement scheme is inversely proportional to the dispersion in types. Finally, we find that offering a menu of contracts can potentially increase social welfare above the level of a simple capitation regime, but it tends to lead to a higher variation in quality levels.