Optimal Health Care Contracts under Physician Agency

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.