Abstract:
In medical markets, patients often rely on the advice of their general practitioner (GP) to decide which treatment best fits their needs. Hospitals, in turn, influence GPs’ referral decision through kickbacks. We formulate a model with a monopolistic hospital and competitive GPs with varying degree of altruism towards their patients who have coinsurance and differ with respect to the utility of hospital care. We analyze whether competition in the primary care market will crowd out altruistic GPs. We show that with both naïve patients and rational patients present, an equilibrium without crowding out exists that separates GPs into referrers and care providers. Naïve patients visit purely selfish (referring) GPs, while rational patients sort themselves between the two groups of GPs. Finally, we investigate the scope for a regulation that optimally sets patients’ coinsurance rate or bans kickbacks.