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Department of Administration and Organization Theory

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Problematic financial incentives

Incentive systems for health services can be problematic, a study of health systems in Bangladesh shows.

Adrien Taylor - Open Air Train

Adrien Taylor - Open Air Train

PhD-Candidate Hasan Muhammad Baniamin and associate professor Ishtiaq Jamil has written an article published in the “International Journal of Public Administration”, with the title “Institutional design for credence goods: Can the existence of financial incentive be problematic? Evidences from childbirth system of Bangladesh”.

They argue that incentive systems for goods such as use of health systems can be problematic, because physicians in private clinics have more instances of overtreatment than their counterparts in other health facilities in Bangladesh – including governmental and nongovernmental ones. This includes five to ten times more use of caesarean sections in private clinics which have higher incentives for overtreament.

This is an indication of a possible problem of New Public Management reforms, which aim to increase efficiency through market-mechanisms. It is particularly problematic in the case of credence goods – that is, goods that an expert knows more about quality and quantity than the consumers do – where the recipients of services are unfamiliar with the intricacies and peculiarities of the goods in questions, and cannot make informed decisions.

The authors find that physicians in private clinics “in Bangladesh tend to opt for overtreatment […] on many occasions, rather than basing this decision on medical grounds, let themselves be swayed by financial incentives”. Further, their work shows that the use of financial incentive systems for credence goods may be problematic, especially in areas where only one private clinic exists. Such monopoly-situations have higher incidences of overtreatment, but the authors note that more competition between clinics may not alone resolve this, because the consumers still have asymmetrical information relative to the physicians.