Question

In a 2009 article, “Operating on Commission: Analyzing How Physicians Financial Incentives Affect Surgery Rates,” Jason Shafrin compared surgery rates for insured patients whose physicians were compensated on a per-capita basis (capitation) with those whose physicians were paid on a fee-for-service (FFS) basis.2 He found that changing from capitation to FFS led to a 78% increase (sic!) in surgery rates. Given only this evidence you can conclude that Shafrin’s work illustrates:

a. Akerlof’s lemon principle, confirming his observation that insurance companies avoid policies on older people due to the risks of adverse selection and high needs for surgery

b. Kerr’s principle that, “you get what you pay for” and an example of behaviors obviously distorted adversely by an incentive compensation scheme

c. A simple case of doctors responding rationally to price signals conveyed by the principal (insurance company)

d. All of the above

Answer 1

Solution: Akerlof’s lemon principle, confirming his observation that insurance companies avoid policies on older people due to the risks of adverse selection and high needs for surgery

Explanation: Due to adverse selection, companies changing from capitation to FFS led to a 78% increase in surgery rates, thus who sell insurance observe physicians were paid on a fee-for-service (FFS) basis are charging higher price than those who were compensated on a per-capita basis (capitation)