Payment mechanism and GP self-selection: capitation versus fee for service

This paper analyzes the consequences of allowing gatekeeping general practitioners (GPs) to select their payment mechanism. We model GPs' behavior under the most common payment schemes (capitation and fee for service) and when GPs can select one among them. Our analysis considers GP heterogeneity in terms of both ability and concern for their patients' health. We show that when the costs of wasteful referrals to costly specialized care are relatively high, fee for service payments are optimal to maximize the expected patients' health net of treatment costs. Conversely, when the losses associated with failed referrals of severely ill patients are relatively high, we show that either GPs' self-selection of a payment form or capitation is optimal. Last, we extend our analysis to endogenous effort and to competition among GPs. In both cases, we show that self-selection is never optimal.