Scenario: Mayo Clinic, a non-profit provider of health care and whose motto is “the needs of the patient come first,” pays doctors a salary rather than a fee for service. Dr. John C. Lewin, chief executive of the American College of Cardiology, argues that salaried doctors can provide better healthcare and lamented that most U.S. health care is divided between small practices and community hospitals that aren’t linked together with incentives to coordinate care. Consider the conventional model of health care, which pays doctors according to the amount of treatment that they provide.

Using a relevant figure (with hypothetical demand and marginal cost), explain how the doctor will overtreat the patient. If doctors are paid a fixed salary, how would that affect their incentive to overtreat? Dr. Lewin believes that a vertically integrated system provides better health care. Suppose that a hospital integrates with a group of heart specialists. Explain the moral hazard of the doctors relative to the hospital. Following the integration in (3), how should the hospital motivate the doctors?