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Optimal Health Care Contracts under Physician Agency

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  • Philippe Chone

    ()
    (CREST-LEI and CNRS URA 2200)

  • Ching-to Albert Ma

    ()
    (Department of Economics, Boston University)

Abstract

We examine contracts between insurers and physicians when the treatment is chosen to maximize a combination of physician profit and patient benefit (“physician agency”). The degree of substitution between doctor profit and patient benefit in the physician-patient coalition is the physician’s private information, as is the patient’s intrinsic valuation of treatment quantity. The equilibrium mechanism only depends on the physician-patient coalition parameter. Moreover, the equilibrium mechanism exhibits extensive pooling, with prescribed quantity and physician reimbursement being insensitive to the agency characteristics or patient’s actual benefit. The optimal mechanism is interpreted as managed care where strict approval protocols are placed on treatments.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2007-041.

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Length: 35 pages
Date of creation: Jan 2007
Date of revision: Sep 2007
Handle: RePEc:bos:wpaper:wp2007-041

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Keywords: physician agency; optimal payment; health care quantity; managed care; minimum profit; asymmetric information;

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References

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  1. Keeler, Emmett B. & Carter, Grace & Newhouse, Joseph P., 1998. "A model of the impact of reimbursement schemes on health plan choice," Journal of Health Economics, Elsevier, vol. 17(3), pages 297-320, June.
  2. McGuire, Thomas G., 2000. "Physician agency," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 9, pages 461-536 Elsevier.
  3. David Bardey & Jean-Charles Rochet, 2010. "Competition Among Health Plans: A Two-Sided Market Approach," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 435-451, 06.
  4. Tim Besley & Maitreesh Ghatak, 2005. "Competition and incentives with motivated agents," LSE Research Online Documents on Economics 928, London School of Economics and Political Science, LSE Library.
  5. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
  6. Mark Dusheiko & Hugh Gravelle & Rowena Jacobs & Peter Smith, 2003. "The Effects of Budgets on Doctors Behaviour: Evidence from a Natural Experiment," The Centre for Market and Public Organisation 03/064, Department of Economics, University of Bristol, UK.
  7. Frank, Richard G. & Glazer, Jacob & McGuire, Thomas G., 2000. "Measuring adverse selection in managed health care," Journal of Health Economics, Elsevier, vol. 19(6), pages 829-854, November.
  8. Ma, Ching-to Albert, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 93-112, Spring.
  9. Ching-to Albert Ma, 1997. "Cost and Quality Incentives in Health Care: Altruistic Providers," Papers 0084, Boston University - Industry Studies Programme.
  10. Ellis, Randall P., 1998. "Creaming, skimping and dumping: provider competition on the intensive and extensive margins1," Journal of Health Economics, Elsevier, vol. 17(5), pages 537-555, October.
  11. Dranove David & Spier Kathryn E., 2003. "A Theory of Utilization Review," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 2(1), pages 1-21, August.
  12. Chalkley, Martin & Malcomson, James M., 1998. "Contracting for health services when patient demand does not reflect quality," Journal of Health Economics, Elsevier, vol. 17(1), pages 1-19, January.
  13. Rochaix, Lise, 1989. "Information asymmetry and search in the market for physicians' services," Journal of Health Economics, Elsevier, vol. 8(1), pages 53-84, March.
  14. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
  15. James R. Baumgardner, 1991. "The Interaction between Forms of Insurance Contract and Types of Technical Change in Medical Care," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 36-53, Spring.
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Cited by:
  1. Luigi Siciliani, 2007. "Paying for performance with altruistic or motivated providers," Discussion Papers 07/33, Department of Economics, University of York.
  2. Godager, Geir & Wiesen, Daniel, 2013. "Profit or patients’ health benefit? Exploring the heterogeneity in physician altruism," Journal of Health Economics, Elsevier, vol. 32(6), pages 1105-1116.
  3. Bardey, David & Canta, Chiara & Lozachmeur, Jean-Marie, 2010. "Health Care Providers Payments Regulation when Horizontal and Vertical Differentiation Matter," TSE Working Papers 10-164, Toulouse School of Economics (TSE).

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