The treadmill effect in a fixed budget system

We examine the interaction in the market for physician services when the total budget for reimbursement is fixed. Physicians obtain points for the services they render. At the end of the period the budget is divided by the sum of all points submitted, which determines the price per point. We show that this retrospective payment system involves - compared to a fee-for-service remuneration system - a severe coordination problem, which potentially leads to the “treadmill effect”. We argue that when market entry is possible, a budget can be efficiency enhancing, if in addition a price floor is used.