Financing medical specialist services in the Netherlands; welfare implications of imperfect agency

From 1995 onward the financing scheme for specialist care in the Netherlands has moved from a fee-for-service scheme to a lump-sum budget scheme.

This paper analyses the economic and welfare effects of this policy change. The paper adopts a model that integrates demand and supply considerations and recognizes the potential roles of moral hazard and supplier-induced demand. The model is fully numerical, being estimated and calibrated upon data for the Dutch health care sector. The paper finds that the shift in financing regime has been welfare-reducing. The policy change induced medical specialists to lower the supply of health services which was already too low from a welfare point of view. This conclusion is robust to significant changes in major parameter values.