Asymmetric Information from Physician Agency: Optimal Payment and Health Care Quality

We model asymmetric information arising from physician agency, and its effect on the design of payment and healthcare quantity. The physician-patient coalition aims to maximize a combination of physician profit and patient benefit. The degree of substitution between profit and patient benefit in the physician-patient coalition is the physician’s private information, as is the patient’s intrinsic valuation of treatment quantity. The equilibrium mechanism depends only on the physician-patient coalition parameter. Moreover, the equilibrium mechanism exhibits extensive pooling, with pre-scribed quantity and payment being insensitive to the agency characteristics or patient’s actual benefit. The optimal mechanism is interpreted as managed care where strict approval protocols are placed on treatments