1. Describe the various principal-agent relationships in the health care sector.
ID: 1138790 • Letter: 1
Question
1. Describe the various principal-agent relationships in the health care sector. Give an example of a situation where the economic interests of the principal and the agent are aligned. Give an example of a situation where the economic interests of the principal and the agent are not aligned. 1. Describe the various principal-agent relationships in the health care sector. Give an example of a situation where the economic interests of the principal and the agent are aligned. Give an example of a situation where the economic interests of the principal and the agent are not aligned.Explanation / Answer
Unlike many industries, where the the utility maximizing consumers and the profit maximizing firms may create an optimal market outcome in a competitive industry, in the health care sector such dynamics may not hold. This is because there is information assymetry between the patients and the health care providers. The doctors have more information regarding the health condition of the patient while the patient is dependent on the information provided by the doctor. the doctor may have incentives to provide false information to patient regarding his or her health status in order to increase their own profits. This is called the principal agent problem and it leads to moral hazard due to information assymetry. That is why if the health sector is left completely unregulated, the doctors may provide wrong information or supress information regarding the severity of the ailments suffered by the patient and exploit the patients. The hospitals may overcharge the patients by inflating the costs (by colluding with other healthcare service providers) and make health care naffordable to the poor.
There may be some situations where the patients as well as the healthcare providers have their interests aligned. For example, if the costs of production of a specific cancer curing medicine increases, the costs borne by the hospitals increase, which in turn also increases the costs to the patients. Both the parties are harmed by the increase in the cost of production of the medicine and their interests in reducing the costs align.
On the other hand, if the governemnt imposes a ceiling price on the price charged by the hospital for treating a particular ailment, the hospital profits will be harmed but the patients will have to pay a lower price for the procedure. in this case, the economic interests of the patients and the hospital do not align.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.