Common-Agency Problems and Contracting in the U.S. Healthcare System

By Brigham Frandsen, Michael Powell, and James B. Rebitzer
National Bureau of Economic Research, NBER Working Paper No. 23177, February 2017

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.

From the Conclusion

In this paper we have developed 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 US 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.

We have examined the common-agency market failure in the context of payers trying to induce providers to make efficient investments in care coordination. We focused on incentives for these investments because they have played an important role in recent health care reform initiatives. The common-agency market failure is, however, much broader than this specific application and is likely to play a role wherever multiple payers seek to influence the actions of a shared provider.

Given the number and diversity of payers, exploring more broadly the implications of common-agency problems in the U.S. healthcare system is likely to be a fruitful avenue for future research. For example, Cutler and Ly (2011) remarks that “insurers have little incentive to coordinate their credentialing and billing requirements, because the costs of imposing different rules are spread across insurers as a whole, not partitioned to any single insurer,” leading to persistently high administrative expenses.

http://www.nber.org/…

You do not have to be an economist to understand an important conclusion of this technical paper. Our complex multi-payer financing system results in persistently high administrative expenses.

In a health care system with multiple payers, sticking points result in 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 costs of imposing different rules are spread across insurers as a whole, not partitioned to any single insurer, leading to persistently high administrative expenses.

Rather than trying to understand and apply the economic theory of the common-agency model, Pareto-dominated contracts, sticking point equilibria, and the onerous quest for more efficient forms of contracting between multiple payers and providers, we can simply eliminate the multi-payer model by enacting a single payer national health program – an improved Medicare for all. That does away with the administrative excesses and inequities of the sticking points that would never be totally eliminated in a multi-payer system.