Testing the myth of fee-for-service and overprovision in health care

Paying on the basis of fee-for-service (FFS) is often associated with a risk of overprovision. Policymakers are therefore increasingly looking to other payment schemes to ensure a more efficient delivery of health care. This study tests whether context plays a role for overprovision under FFS. Using a laboratory experiment involving medical students, we test the extent of overprovision under FFS when the subjects face different fee sizes, patient types, and market conditions. We observe that decreasing the fee size has an effect on overprovision under both market conditions. We also observe that patients who are harmed by excess treatment are at little risk of overprovision. Finally, when subjects face resource constraints but still have an incentive to overprovide high-profit services, they hesitate to do so, implying that the presence of opportunity costs in terms of reduced benefits to other patients protects against overprovision. Thus, this study provides evidence that the risk of overprovision under FFS depends on fee sizes, patients' health profiles, and market conditions.