The effect of internal salary incentives based on insurance payment on physicians' behavior: experimental evidence

Understanding how physicians respond to payment methods is crucial for designing effective incentives and enhancing the insurance system. Previous theoretical research has explored the effects of payment methods on physician behavior based on a two-level incentive path; however, empirical evidence to validate these theoretical frameworks is lacking. To address this research gap, we conducted a laboratory experiment to investigate physicians' behavioral responses to three types of internal salary incentives based on diagnosis-related-group (DRG) and fee-for-service (FFS).

A total of 150 medical students from Capital Medical University were recruited as participants. These subjects played the role of physicians in choosing the quantity of medical services for nine types of patients under three types of salary incentives-fixed wage, constant fixed wage with variable performance wage, and variable fixed wage with variable performance wage, of which performance wage referred to the payment method balance under FFS or DRG. We collected data on the quantities of medical services provided by the participants and analyzed the results using the Friedman test and the fixed effects model.

The results showed that a fixed wage level did not have a significant impact on physicians' behavior. However, the patients benefited more under the fixed wage compared to other salary incentives. In the case of a floating wage system, which consisted of a constant fixed wage and a variable performance wage from the payment method balance, an increase in performance wage led to a decrease in physicians' service provision under DRG but an increase under FFS. Consequently, this resulted in a decrease in patient benefit. When the salary level remained constant, but the composition of the salary varied, physicians' behavior changed slightly under FFS but not significantly under DRG. Additionally, patient benefits decreased as the ratio of performance wages increased under FFS.

While using payment method balance as physicians' salary may be effective in transferring incentives of payment methods to physicians through internal compensation frameworks, it should be used with caution, particularly when the measurement standard of care is imperfect.