Hugh Gravelle and Giuliano Masiero
The British National Health Service is a prominent example of a regulated capitated primary care system. Care is provided free of charge to patients. All patients must join the list of a general practitioner (GP) who is paid a tax-financed capitation fee for each registered patient. One rationale of a capitated system is to provide an incentive to GPs to compete via quality for additional patients. GPs can vary the quality of their service, for example increasing their surgery opening hours, employing more practice nurses to provide additional services, being more willing to make home visits, or keeping their medical knowledge up to date. Higher capitation fees make it more profitable to attract additional patients by raising the quality of the service provided.
Patients are unlikely to be very good judges of quality. The extensive literature on doctor-patient agency problems attests to the prevalence of the belief that patients are imperfectly informed about the quality of their doctors. However, it can be argued that many aspects of quality in primary care which may not be obvious when choosing a practice can be judged by patients once they have experienced them. Examples range from the interpersonal aspects of consultations to the ease of getting appointments or out of hours visits. Thus at least some aspects of the practice are experience goods.
But even if patients become better informed about their practice after experiencing its care, they face costs in switching to another GP. Their new GP will be initially less well informed about them than their current doctor. Medical records are an imperfect substitute for personal contact and are transferred with a significant delay. Thus in addition to the time and trouble involved in changing registrations, switching to another GP imposes costs in the form of a lower initial level of care ceteris paribus.
In this chapter we consider the extent to which imperfect patient information about quality and switching costs interact to blunt incentives to improve quality when capitation fees are increased. Our focus is on the extent to which different assumptions about the sophistication of patients leads to different conclusions about the power of the capitation system as a means of increasing quality. Given that patients are imperfect judges of quality when initially choosing a practice, we