Is the target income hypothesis an economic heresy?

This study is the first to relate physician-specific measures of target and actual income to pricing decisions. We find that a higher ratio of target to actual income leads to a significant price increase among self-employed, fee-for-service primary care physicians, with an elasticity of approximately 0.3, but not among self-employed primary care physicians who are not paid on a fee-for-service basis. Thus we find evidence of target income pricing when, as in the case of fee-for-service practices, physicians stand to gain financially from their pricing decisions. Although the target income hypothesis (TIH) has been criticized for lacking firm grounding in economic theory, this article argues that the notion of targets has a long history in economic theory and pricing to achieve a target is not new. Moreover, a variety of economic explanations render such behavior consistent with profit maximizing objectives.