Jan 7, 2014

Insurance coverage and agency problems (China)

I reread Arrow's 1963 classic article on uncertainty in the welfare economics of medical care, where he compares the health care industry with the hypothetical perfectly-competitive market. He talks about many things and one of them is the principal-agent problem. 

From a new published paper by Fangwen Lu (Journal of Development Economics, 2014) on that issue (ungated, here):
This study examines doctors' prescribing decisions using controlled hospital visits with randomized patient insurance and doctor incentive status. The results suggest that, when they expect to obtain a proportion of patients' drug expenditures, doctors write 43% more expensive prescriptions to insured patients than to uninsured patients. These differences are largely explained by an agency hypothesis that doctors act out of self-interest by prescribing unnecessary or excessively expensive drugs to insured patients, rather than by aconsiderate doctor hypothesis that doctors take account of the tradeoff between drug efficacy and patients' ability to pay.
"In China, doctors can pocket profits from selling drugs" (p. 2). 

Many of Arrow's ideas are valid today, but new technologies are changing the industry, and more changes are coming (think about rankings of doctors, and all the examples in Average is Over).

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