Specialist payment schemes and patient selection in private and public hospitals

It has been observed that specialist physicians who work in private hospitals are usually paid by fee-for-service while specialist physicians who work in public hospitals are usually paid by salary. This paper provides an explanation for this observation. Essentially, fee-for-service aligns the interests of income preferring specialists with profit maximizing private hospitals and results in private hospitals treating a high proportion of short stay patients. On the other hand, salary aligns the interests of fairness preferring specialists with benevolent public hospitals that commit to admit all patients irrespective of their expected length of stay.