Penetrating the “Black Box”: Financial Incentives for Enhancing the Quality of Physician Services

This article addresses the impact of financial incentives on physician behavior, focusing on quality of care. Changing market conditions, evolving social forces, and continuing organizational evolution in health services have raised societal awareness and expectations concerning quality. This article proceeds in four parts. First, the authors place financial incentives in the context of broader forces shaping the quality of physician services. Second, the article reviews the literature on financial incentive effects on physician behavior. Third, a simple net income maximization model of physician choices is presented, from which are derived formal hypotheses regarding the effect of financial incentives on physician choices of quality per unit of physician service and the quantity of services per patient. The model is extended qualitatively to offer further hypotheses and research directions. Finally, gaps and limitations of the model and of the extant empirical research are articulated, and additional researchable questions are posed.