ECON 440 Lecture Notes - Lecture 18: Productive Efficiency, Fixed Price, Price Controls
13 Jun 2018
School
Department
Course
Professor
Increase coverage (universal health care, maximize health)
1.
Improve patient experience
2.
Be as efficient as possible
3.
Triple Aim
•
Asymmetric information
○
People discount optimal choices - time inconsistent preferences
○
Sick patients are in vulnerable states - not making rational decisions
○
Face high or low OOP costs
○
Reasons optimal insurance/care/services not chosen (by patients)
•
Review
What are they? What are their problems?
○
Yardstick Competition (intuition)
○
Principal - agent relationships
•
Principal - agent in health care
•
Power of payment systems
○
Risk-bearing
○
Adverse Selection vs. Productive Efficiency
○
Paying health insurers and providers
•
What should we really be paying for?
•
Outline
Health care providers: individuals (physicians) and organizations (clinics and hospitals)
▪
Financial intermediaries: insurers and regional health boards
▪
Who gets paid?
○
What is the "basis of payment", that is, the unit of health care to which a price is attached?
▪
The dollar (payment) attached creates different incentives for providers
▪
What gets paid?
○
What is (are) the funding mechanism(s)?
▪
Before vs. after
▪
How is payment made?
Determines how providers are organized and paid
•
Answers to these questions reveal who has the incentive to do what in the health care system
•
A Health Care Sste…
P-A relationships arise when someone wants an outcome achieved but cannot do the work themselves
•
How to motivate the agent to pursue the principal's objective instead of their own?
○
The principal wants to achieve an objective, must contract with the agent to do the work
•
An agent's effort (or ability) isn't always observable to the principal
▪
The degree to which their effort affects the outcome may be unknown (vs. random factors)
▪
BUT asymmetric information creates problems:
○
Usually, both the P and A can observe the outcome
•
Cat owner and cat-sitter
○
Firm owner and factory manager
○
Patient and physician
○
Employer/government and the insurer
○
The insurer and the physician
○
Principal and agent examples:
•
The principal wants to achieve their objective as efficiently as possible
•
Principal-Agent Relationships
Lecture 18 - Health Care System Funding: Incentives and
Tradeoffs
Wednesday, March 21, 2018
12:56 AM
ECON 440 Page 1
find more resources at oneclass.com
find more resources at oneclass.com
At the lowest cost (productive efficiency)
○
The insurer wants the provider to meet the health care needs of the insurer's enrollees efficiently
○
The principal wants to achieve their objective as efficiently as possible
•
These two may have competing objectives, in addition to the physician having their own
▪
They have two principals: the insurer and the patient
○
What does the agent want?
•
Increase information
○
e.g. selecting certain workers, team building exercises, etc.
▪
Create a "culture" to encourage the desired behavior
○
Align objectives via financial incentives in the payment structure
○
The principal has three main options:
•
•
Hours worked, effort expended, costs incurred, output produced, etc.
○
Retrospective: ex-post payments based on what the agent does
•
Fixed payments to do the job, anything left over you keep as profit
○
Conditional on outcome, we want to incur the lowest possible costs
○
Fixed lump-sum, fixed salary, etc.
○
Prospective: ex-ante payments not based on what you do or your costs
•
Flow of Payments Also Reveal the Principal-Agent Relationships
Agents produce a homogenous product but have different cost structures
○
Cost of production is observable by the principal and is partly a function of managerial effort by the
agent
○
Asymmetric information about managerial effort between the agent and the principal
○
Shleifer (1985) suggested that fully prospective payment is optimal IF:
•
Payment at the average of all other firm's marginal costs will induce each firm to produce efficiently
○
Recommendation: Fixed price that is not a function of actual cost
•
Managers will invest the optimal amount of effort to produce efficiently IF they keep the full reward from
doing so
•
Theory of Yardstick Competition
"aims to evaluate the costs of each type of care in various resolutions, reduce the disparity, and set an
average price for each health care service offered in the province"
○
News: Quebec health reform to standardize medical treatment costs
•
Evaluate difference in costs --> give each hospital same amount for each procedure --> standardize
payment
○
Quebec health ministry hired firms to measure costs of health care procedures in different
hospitals/institutions in QC
•
Some hospitals see more patients that are differentially more expensive to provide and care for
Cost of producing health for health care provider not the same from patient to patient
•
From Theory to Practice?
ECON 440 Page 2
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Lecture 18 - health care system funding: incentives and. People discount optimal choices - time inconsistent preferences. Sick patients are in vulnerable states - not making rational decisions. Health care providers: individuals (physicians) and organizations (clinics and hospitals) The dollar (payment) attached creates different incentives for providers. Answers to these questions reveal who has the incentive to do what in the health care system. P-a relationships arise when someone wants an outcome achieved but cannot do the work themselves. The principal wants to achieve an objective, must contract with the agent to do the work. Usually, both the p and a can observe the outcome. An agent"s effort (or ability) isn"t always observable to the principal. The degree to which their effort affects the outcome may be unknown (vs. random factors) The principal wants to achieve their objective as efficiently as possible. The insurer wants the provider to meet the health care needs of the insurer"s enrollees efficiently.
