Physicians' payment contracts, treatment decisions and diagnosis accuracy.

We derive optimal payment contracts for physicians when neither physicians' effort to gather information about the patient's health condition (diagnosis effort) nor the actual patient's health condition (physicians' private information) are contractible. In a model where the patient is allowed to demand health care on more than one occasion, we show that, in general, the optimal payment contract includes supply-side cost sharing. This provides the physician with incentives to provide the most adequate treatment and to gather an informative signal about the patient's illness, to decrease the likelihood of future cost sharing. However, for some extreme values of the parameters of the model, we show that a public insurer may prefer to induce some 'blind' decision making. Copyright 2001 John Wiley & Sons, Ltd.