Quality incentives under a capitation regime: the role of patient expectations

We model the interaction between patient uncertainty about qualityand switching costs in a market for primary care in which general practitioners (GPs) are paid from general taxation. GPs compete via theirquality which is initially imperfectly observed by patients. Patientsmay be sophisticated and know they may wish to switch GPs afterobserving their true quality; or they may be myopic and not realisetheir initial observations of quality are mistaken; or they make biasedestimates of quality. We examine the incentive e ects of capitationpayments under these three assumptions about patient expectations. We show that imperfect information and switching costs reduce quality and dilute the incentive e ects of increases in the capitation feeirrespective of patient sophistication.