Supply-side cost sharing when patients and doctors collude

Doctors and patients generally share a common interest in maximizing the quality of care. Purchasers of health care on the other hand, desire cost-effective levels of quality. We consider the purchaser’s problem of implementing supply-side cost sharing when patients and doctors are asymmetrically informed and can collude to advance their own joint interests in maximal quality. Such collusion can be interpreted as the sort of informal side-payments that are observed in transitional and developing economies. It may also be interpreted as a “formal” (but unregulated) case of physician balance billing. We show that both collusion-proof schemes and collusion-inducing schemes can implement cost-effective care. A number of policy implications are discussed. In particular, more permissive advertising of referred services (such as pharmaceuticals) and more informed patients will increase the cost of implementing collusion-proof mechanisms. If patients have a high willingness to pay or are informed, then allowing collusion may be preferred.