Blomqvist (1991) The doctor as double agent@ information asymmetry, Health Insurance and Medical care JHE

Abstract A model is set up incorporating: uncertainty state dependent utility of health services Information Asymmetry between patients and buyers Information asymmetry between physicians and sellers 2 types of equilibria are found: 1. Where consumers have conventional third party insurance and doctors are paid on the basis of fee-forervice 2. When insurance is through an HMO which provides health services through its own doctors Conditions are found under which contractual or legal incentives can overcome the information asymmetry problem and bring about an efficient allocation of resources to health services provision. Introduction Health services have special characteristics that influence institutional arrangements in the market where they are supplied: Given, state dependent nature of demand for health services o most of the cost of healthcare is covered in form of public of private insurance Relationship between providers of medical services and patients is characterised by medical insurance o Collection and evaluation of diagnostic information can be performed only by trained physicians and cannot easily be separated from the provision of medical treatment. Even with accurate diagnostic information, considerable randomness in relation between healthcare and healthcare outcomes Quality of treatment received cannot be easily inferred = No precise guarantees available. CENTRAL ISSUE IN ORGANISATION OF HEALTH INSURANCE AND MEDICAL CARE: nature of contractual relationships among patient, physician and provider of insurance (pp.412) o Patients have an interest in having physicians act as agents in providing information o Providers of insurance interested in having doctors economise on use of health services and reduce costs Doctors are thus double agents o Doctors should act in interest of patients, but also have to take in consideration cost of insurance provider o This double agency (information asymmetry and third party financing) that differentiates health services sector from all other sectors in which the principal agent problem exists. This paper is to investigate the properties of alternative contractual arrangements of asymmetric information in the market fo health insurance and medical services: Simple model where: o Physician who diagnoses a patient acquires private information concerning the patient (i.e. information not available to insurer or patient) o 2 Cases: Fee for service system for physicians and where patients have insurance such that part or all of the health service costs are paid for A system where all individuals are implicitly insured through a Health Maintenance Organisation who provides medical care to its clients through its own physicians. o Results: HMO may bring about some improvement in efficiency However, HMO does not overcome the problem of imperfect agency altogether Double agency requires some other instrument; Performance Guarantee or Liability rule could work o But performance is imperfectly observed through health outcomes

Blomqvist (1991) The doctor as double agent@ information asymmetry, Health Insurance and Medical care JHE

Certain conditions it is possible to design a system of performance guarantee to achieve results which would overcome information asymmetry (where physicians and consumers have same information) However such guarantees are not used in the medical care field o Medical practice rules may be seen as providing some sort of guarantee o Other types of guarantee could be given through voluntary practice

Problems with model: Highly simplified: o Assumes insurance (either in HMO contracts or of conventional kind) are offered in perfectly competitive markets on actuarially fair terms: Design of mechanisms or state run insurance schemes are not compared to imperfectly competitive insurance systems o No recognition of the significance of the medical professions discipline codes and ethics in providing incentives for physicians to refrain from exploiting their informationadvntages. Difficult to formalise effect of a code Method set out: 1. Outline Health insurance and medical care under full information First best solution o Consumer is always fully insured, Marginal utility of consumption is same in each state of health 2. Fee for service and conventional insurance with Asymmetric information Information Asymmetry exists o Physicians may not always tell their patients the truth (commonly noted in medical literature) Fee for service doctors may slant the truth to create additional demand for the services they provide Not price takers Try and increase demand o If physicians act as strict price takers (i.e. sell any quantity at market rate) they have no incentive to manipulate demand in this way, but since they have some degree of monopoly power, they have an incentive to induce extra demand. Risk of being held liable Increase medical services required o Also tend to exaggerate problems because they hold risk of being held liable for damages if they do not sufficiently impress on patients the urgency of obtaining a particular amount of medical services.

3. PrePayment Contracts under HMO Since physicians are now employees of insurer, have some incentive to care about economic incentives and thus will act in interest of insurer (ASSUMES ACT AS PERFECT AGENTS) o Does not overcome information asymmetry between patient and doctor Eliminates moral hazard effect that patient does not pay for full cost of medical services consumed (done through prior limitation on amount of care that will be provided in case of each illness) 4. Stochastic Performance Guarantee Information about probability of different outcomes is available, and so even though imperfect, may be possible to hold HMO liable even though its agents as fulfilled its conctract. I.e. penalty given if outcome of particular diagnosis and treatment falls sufficiently far below what would have been expected if the contract had been fulfilled. However, enforcement of such a penalty may also have costs, and could reduce efficiency of such a system

Blomqvist (1991) The doctor as double agent@ information asymmetry, Health Insurance and Medical care JHE

System could perhaps be applied to try and give incentives for doctors to act in interest of patients in fee for service systems

Dr. O Shaughnessys Interpretation of Blomqvist

Individual can have a level of health h

{h0 , h1, h2 , h3... hn )

, where h0 represents the best possible level of health

and hn represents the worst possible level of healthcare.

A doctor can prescribe a level of healthcare x

{x0 , x1, x2 , x3....xn )

, where xi is the appropriate level of healthcare

to be consumed by a patient with a level of health hi . An individual with a headache does not want to receive brain surgery (both in terms of personal health risk and in terms of cost). Case 1: No informational problems Patient will get optimal treatment in each state of health Full insurance will be possible No excess required Premium will be cost of optimal treatment averaged for probability of each level of treatment required

Case 2: Insurance Company does not Observe Diagnosis by Doctor Doctor observes diagnosis and tells Patient appropriately Patient will have incentive to increase treatment a little to avoid risk of bad health Full insurance is thus not possible: o Thus partial insurance required with an excess

Case 3: Neither Insurance Company nor Patient can observe diagosis Patient just knows that diagnosis is greater than 0 IC cannot see diagnosis, but doctor can. If fee depended on level of treatment required, doctor may incentive to overstate