Asymmetric Information from Physician Agency : Optimal Payment and Healthcare Quantity

We model asymmetric information arising from physician agency, and its effect on the design ofpayment and healthcare quantity. The physician-patient coalition aims to maximize a combinationof physician profit and patient benefit. The degree of substitution between profit and patient benefitin the physician-patient coalition is the physician’s private information, as is the patient’s intrinsicvaluation of treatment quantity. The equilibrium mechanism depends only on the physician-patientcoalition parameter. Moreover, the equilibrium mechanism exhibits extensive pooling, with prescribedquantity and payment being insensitive to the agency characteristics or patient’s actualbenefit. The optimal mechanism is interpreted as managed care where strict approval protocols areplaced on treatments.