Agency in health care: lessons for economists from sociologists

American Journal of Economics and Sociology, The, April, 1994 by Mandy Ryan

Introduction

CONSUMER SOVEREIGNTY many economists have argued, does not apply in the market for health care because of the asymmetry of information between the patient and doctor. The patient-doctor relationship has thus been modelled within the economic theory of agency, with consideration of associated incentive problems.

While the concept of agency has become widely accepted in health economics, very little research has been carried out into the distribution of property rights within this relationship i.e. what are the rights of the patients and doctors within this relationship and what ought they to be? To answer these questions information is needed on the nature of the patient's and the doctor's utility functions.

It is important to know the nature of the patient's and doctor's utility functions for two reasons. Firstly given the interdependence of the patient's and doctor's utility function, a necessary (but not sufficient) condition for an efficient outcome in health care is that we establish the nature of these utility functions. Only then can we attempt to devise optimal reward systems that encourage doctors to consider patient preferences in the decision-making process. Secondly, only when health economists know the nature of the patient's utility function will they be able to evaluate health care interventions properly.

The purpose of this paper is to shed light on the nature of the patient's and doctor's utility functions. It is shown that, to date, most health economists have assumed that the only relevant argument in the patient's utility function is health outcome. Consideration of the doctor's utility function by health economists has tended to take place within the debate on supplier-induced demand, concentrating on the trade-offs that exist between income and leisure. Leading on from this, the paper considers the sociological literature on the doctor-patient relationship. It is argued that only when economists take note of this literature will a more efficient outcome in health care be achieved.

II

The Economic Theory of Agency

THE ECONOMIC THEORY OF AGENCY arises out of the existence of an asymmetry of information i.e. the individuals involved in a transaction have different levels of information. Such a situation exists in many markets: firms and employees, insurance companies and clients, patients and doctors, a car mechanic and his/her client.

The basic theory is characterized by a principal (ill-informed individual) and agent (informed individual), both of whom are attempting to maximise their independent utility functions. The recognition of these independent utility functions, coupled with the assymetry of information, makes the agency relationship interesting since these two characteristics mean that the agent has scope for the pursuit of his/her own interests. Thus, in the case of the car mechanic and client, given that the client has less information than the mechanic regarding what is wrong with the car, the mechanic may induce demand to maximise his/her income, and say, for example, that the car needs new parts that it does not.

Given this, the principal must devise a method of remuneration to ensure that the agent does not cheat. This is accomplished by compensation rules or incentive compatibility constraints |MacDonald (1984), Arrow (1986)~. Given that the agent has the choice of whether or not to accept the remuneration system, the principal has to ensure that the contract is attractive to the agent. This is known as the viability or participation constraint |Arrow (1986)~.

Although at first sight principal-agency theory seems directly relevant to the doctor-patient relationship, closer examination reveals key differences. These differences must be recognized if we are to understand the interactions that take place between a doctor and a patient. In the next section we look at how economists have modelled the agency relationship in health care.

III

The Doctor-Patient Relationship: An Economist's Perspective

SOME ECONOMISTS have acknowledged that the independent utility functions that are crucial in the standard economic theory of agency are mitigated when the theory is applied to health care.

What distinguishes the professional agency relationship is that the professional includes part at least of the patient's/client's interests in her own objectives. (Evans, 1984)

Thus, within health care, we cannot assume that the agent's role is to maximize self interest independent of the principal's utility function. The professional role of the doctor suggests that there will be an interaction between the patient's and the doctor's preferences. But there has been very little research by economists concerning the nature of the doctor-patient relationship, the nature and distribution of the property rights and the arguments within the doctor's and patient's utility functions. Two questions must be considered here: what do patients want from the doctor-patient relationship? And what do doctors want from the doctor-patient relationship?