Working Paper: NBER ID: w23177
Authors: Brigham Frandsen; Michael Powell; James B. Rebitzer
Abstract: We propose a "common-agency" model for explaining inefficient contracting in the U.S. healthcare system. In our setting, common-agency problems arise when multiple payers seek to motivate a shared provider to invest in improved care coordination. Our approach differs from other common-agency models in that we analyze "sticking points," that is, equilibria in which payers coordinate around Pareto-dominated contracts that do not offer providers incentives to implement efficient investments. These sticking points offer a straightforward explanation for three long observed but hard to explain features of the U.S. healthcare system: the ubiquity of fee-for-service contracting arrangements outside of Medicare; problematic care coordination; and the historic reliance on small, single specialty practices rather than larger multi-specialty group practices to deliver care. The common-agency model also provides insights on the effects of policies, such as Accountable Care Organizations, that aim to promote more efficient forms of contracting between payers and providers.
Keywords: common agency; healthcare contracting; fee-for-service; care coordination; accountable care organizations
JEL Codes: D8; I10; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| coordination failures among payers (I18) | reliance on fee-for-service contracts (L14) |
| reliance on fee-for-service contracts (L14) | weak incentives for providers to invest in care coordination (I11) |
| coordination failures among payers (I18) | sticking point equilibria (D50) |
| sticking point equilibria (D50) | Pareto-dominated contracts (D86) |
| Pareto-dominated contracts (D86) | failure to incentivize efficient investments in healthcare delivery (H51) |
| coordination failures among payers (I18) | hindered formation of integrated multispecialty group practices (L44) |
| hindered formation of integrated multispecialty group practices (L44) | weakened incentives to invest in health information technology systems (H51) |
| accountable care organizations (L84) | crowd in more efficient private sector contracts (L33) |
| aggressiveness of Medicare's intervention (I18) | effect on crowding in more efficient private sector contracts (L33) |
| common agency problems (D82) | third-best incentive contracts (D86) |
| third-best incentive contracts (D86) | exacerbate inefficiencies in healthcare delivery (I11) |