E&F - lecture 3 Flashcards
Asymmetric information
- an agent has certain goals
- a principle has certain goals and needs the agent to obtain his goals
- the agent and principle also have self-interest
- when the agent knows more about his performance than the principle who is in charge of the relationship, asymmetric information occurs
Asymmetric information and agency relationships
- Transactions in markets with asymmetric information are characterized by agency relationships.
- Whenever the relatively uninformed party (principal) delegates decision making authority to the relatively well-informed party (agent)
- Principal-agent problems emerge if principal and agent have conflicting interests
- In that case, agents have an incentive to exploit their information surplus
- Resulting in inefficient outcomes (in terms of quantity, quality and price)
Asymmetric information and agency relationships
- Principal-agent problems may be exacerbated if there is considerable outcome uncertainty in which case it is not clear whether the outcome is the result by the actions of the agent
- Health care markets consist of - at least - three parties (patients, providers and “third party payers”), each with different levels of information and different interests
3 agency relationships
1. Patient vs provider - Patient is principle, provider is agent (well-informed)
2. Provider vs payer (insurer or government) - Both can be principle and agent
3. Patient / insured vs payer (insurer or government) - Intertwined agency relationships: particularly noteworthy is the double agency role of physicians
- With regard to patients:
to provide high quality care - With regard to third-party payers:
to economize on the use of care
Agency relations in health care
- Agency problems between doctors and patients
o The “perfect” physician is one who chooses as the patients themselves would choose if only the patients possessed the information that the physician does
o This is in line with the medical code of ethics - Consumer information and prices
o Medical care is a reputation good – you never know how good it is unless you consume it
o Market can be characterized as monopolistically competitive – many healthcare markets are not monopolies, there are several providers, but it is also not a perfect market. There is product differentiation, there is competition, but there are also dominant positions.
o Under these conditions, an increase in the number of providers can increase prices. Reason is: when medical care is a reputation good and the number of providers increase, the number of observations from individual patients telling about their experiences with a certain provider decreases. So there is less information about individual providers and therefore individual providers increase market power and can increase prices. The market becomes less transparant and because of this gives providers market power.
Agency relations in health care (2)
- Consumer information and quality
- Consumers cannot easily monitor quality – because health care is highly differentiated and complex
- Costly search for quality information – often not available
- Consequences of poor quality can be severe
- Cream-skimming behaviour of insurers
- Insurers being more interested in searching for “good risks” rather than in providing quality care for people who need it the most
Principal-agent issues: moral hazard
- Moral hazard
- Principal: insurer (un-informed party)
- Agent: patient and/or doctor (well-informed party)
- Problems:
Ø Patients may take less preventive action due to insurance (ex-ante moral hazard)
Ø Patients may use more, or more expensive, health care due to insurance (ex-post moral hazard)
Ø Physicians may prescribe more, or more expensive, health care due to insurance (provider induced moral hazard)
- Result: overconsumption / overprovision of care
Principal-agent issues: adverse selection
- Adverse selection
- Principal: insurer
- Agent: applicant for insurance (someone looking for an insurance)
- Problem: applicants may exploit their risk-information surplus to buy more coverage at a stated premium than an equally well-informed insurer would be prepared to offer
Ø Premiums increase → healthy people increasingly flee → unhealthy people remain → insurers’ average costs increase → premiums increase → …
- Result: elimination of the health insurance market
Ø Akerlof (1970): “lemons principle”. Car sale example. You want to buy a new car, but you do not know the true value of the car and the buyer does. If you bought a “lemon” you have a problem, because you paid more than the value of the car.
Ø “Adverse selection death spiral“. Young and healthy people are not in the risk pool. In the risk pool you see older and sick people, so high care expenditure. Young and healthy, who would pay higher premiums than their health care costs are, do not join this pool. This is a recipe for a disaster.
Principal-agent issues: supplier induced demand
- Supplier induced demand
* principal: patient
o directly or indirectly through their insurer
* agent: physician
* problem: physician may exploit information surplus to provide more, or more expensive, health care than necessary
* result: overprovision of health care
Principal-agent issues: supplier induced demand (2)
Supplier induced demand
* principal-patient
o dependency on agents to provide optimal efficient care
o may be induced by the agents to consume more or less services (care) that may be harmful to the principal’s welfare
* agent-physician
o asymmetric information
o agents have more knowledge than the principal
o agents may violate their role for personal gain
o violation of agency occurs by inducing their principals to consume non-optimal healthcare
Principal-agent issues: supplier induced demand
* physicians may engage in some persuasive activity to shift the patient’s demand curve
o goal = own financial benefit
* in other words, demand in excess of what would be chosen if patient had available the same information and knowledge as the physician. So demand is in this case higher.
* much attention in the HE literature over the past decades
o methodological challenges
o Empirical study for Nl: Douven et al. (2015)
SID: Douven et al. (2015)
- Volume-based & open-ended
payments for FFS physicians (fee for service they have an incentive to provide more care) - Opposed to salaried physicians
- Utilization rates higher in areas with more FFS physicians
- After (indirectly) controlling for differences in health status
- Strong effect for supply sensitive treatment
Ø Such as cataracts and tonsillectomies
Ø Area between care is necessary and care is not necessary - Validity test: hip fracture treatment density not related to physician remuneration
- Generally speaking, SID is more likely when
o Providers are paid on a fee-for-service
o Fees exceed marginal cost of providing extra services
o Patients are (fully) covered by health insurance
o Patients are free to choose their doctor because patients are then asking for more care
o Ambiguity/ risks in the diagnosis
Theoretical model of SID
- Physicians’ aim is to maximize utility
o Trade off between income (+), leisure (+), and inducement (-) - Physicians may not fully exploit their potential for SID because of:
o Ethical/ professional constraints
o Target (or: reference) income - Summary: a rise or fall in income, for any reason, will cause the physician to reconsider the choice about how much to work
- Physicians can induce demand for their services but they dislike doing so
Brief summary of empirical evidence on SID
- Extent of SID depends on type of care
o Patient- or physician-initiated; “soft” or “hard” diagnosis - Potential for SID is limited:
o Diminishing marginal increase of SID if supply increases - Physician’s target income does play a role
o More SID if physicians’ income < reference income - Financial incentives matter
o Fee-for-service: evidence of overprovision
o Capitation: evidence of underprovision people who get paid per period
General strategies to reduce principal-agent problems
- reduce existing information asymmetries
- align agent-principal interests
- reduce existing information asymmetries
- Require information from agents (e.g. licensure, certification, accreditation)
- Introduce and improve performance measurement
- Provide agents with incentives to reveal information
