Module 3 Flashcards
What does asymmetric information mean?
When the agent knows more about the activities than the principal (who’s responsible for the action)
What are the 3 types of agency relations in HC?
- Patient (insured) vs provider
- Provider vs payer (insurer)
- Patient (insured) vs payer (insurer)
What is a principal-agent problem?
Transactions in markets with asymmetric information are characterised by agency relations - the principal (uninformed party) delegates decision making authority to the agent (well-informed party).
Principal-agent problems arise when these have conflicting interests (agents have incentive to exploit their information surplus which results in inefficient outcomes)
What are intertwined agency relations?
The double agency role of physicians:
- with regards to patients: provide high quality care
- with regards to 3rd party payers: to economize the use of care
Considering that medical care is a reputation good (we only know about the reputation until we actually use it) and HC is a monopolistically competitive market, how is consumer information and prices related?
If there’s an increase in nº of providers:
More doctors, but the same nº of patients -> nº of observations telling about their experience with certain providers decreases -> less information about the performance of providers -> increase of market power of providers -> Prices increase
What are the issues associated with the increase in prices and consumer information?
- Consumers cannot easily monitor quality + it’s costly and hard to have quality information
- Consequences of poor quality HC can be severe
- Cream skimming behavior of insurers
What is cream skimming behavior (seen in insurers)?
Cream skimming refers to the practice where health plans selectively choose low-risk consumers over high-risk consumers within the same premium-risk-group, often by structuring their coverage to be unattractive to high-risk individuals.
What are the 3 types of principal-agent issues?
- Moral hazard
- Adverse selection
- Supplier induced demand
Describe the moral hazard P-A issue (mentioning who is the principal, agent, main problems and result of this issue).
Principal: insurer
Agent: patient and/or doctor
Problems:
- patients may take less preventive action due to insurance (ex ante): insured patients don’t feel the economic consequences because it’s reimbursed by the insurer
- patients may use more (or more expensive) HC due to insurance (ex post) - once you have a disease you may use more HC
- physicians may prescribe more (or more expensive) HC because the patient is insured (provider induced moral hazzard)
Result: overconsumption/overprovision of HC
Describe the adverse selection P-A issue (mentioning who is the principal, agent, main problems and result of this issue).
Principal: insurer (relatively uninformed)
Agent: applicant for insurance (relatively informed)
Problem(s):
- Applicants may exploit their risk-information surplus to buy more coverage at a premium than an equally well-informed insurer could offer (people know better their own health status)
-> Premiums increase -> healthy people leave that insurer -> unhealthy people remain -> insurer average costs increase -> premiums increase -> (…)
Result: elimination of health insurance market (adverse selection death spiral)
Describe the supplier induced demand P-A issue (mentioning who is the principal, agent, main problems and result of this issue).
Principal: patient (directly or indirectly through insurer)
Agent: physician
Problems:
- physician may exploit information surplus to provide more, or more expensive, healthcare than necessary
- physicians engage in persuasive activity to shift patients’ demand curve (to benefit themselves financially or otherwise)
Result: overprovision of healthcare
What happens to the supply and demand curves under supplier induced demand?
SID: when supply shifts to the right (price decrease, quantity increase) then there is also an upwards shift of the demand curve (price increase, quantity increase) - lower price decrease and higher quantity increase
In what situations does SID usually occur?
- Physicians are paid on a fee-for-service
- fees exceed the marginal cost of providing extra service
- patient’s are fully covered by health insurance
- patients are free to choose their own doctor
- there’s ambiguity/risks in the diagnosis
What is the theoretical model of SID?
Physicians aim to maximize utility (trade off between income, leisure and inducement) - they may not fully exploit their potential for SID due to ethical constraints and/or target income
What are the two methods to reduce P-A problems?
- Reduce existing information asymmetries
- Align A-P interests
