Question

Explain the agency problem that arise in the health care sector and give an example of where they occur in health care.

Answer 1

The key agent issue in health care occurs when providers act to increase their own income against patient interests, and especially when there is a lack of regulations, incentives are skewed, and information asymmetry between providers and patients is high. Demand related to the quantity and quality of drugs were found in Vietnam's private health sector. Patient education has helped to combat this driven demand as a source of information and empowerment. Problems with agencies— also known as problems with principal agents or conflicts of interest driven by asymmetric information are inherent in many corporate structures. This conflict arises when there are competing interests of separate parties in a business relationship, such as managers and investors of a company, or directors and agents. Principals hire agents to represent the interests of the principal. Agents are considered to work as workers and are expected to serve the best interests of the principal. Problems arise when the agent begins to represent various interests, such as the agent's own interests.

Several major differences between the incentive structures in the public and the private sectors affect the behaviour of individual providers. Because clinics, the most common form of private practice, are usually staffed by one or more providers, the income of each provider is directly linked to their clinic's income. This program creates a strong incentive to optimize medical benefits for each patient. This maximization, combined with fee-for-service as the only way to charge patients, means increasing the volume of services, especially those that are more lucrative

In the healthcare market, the relationship between provider and client is often defined as a partnership between the principal agent. The principal (patient) appoints an agent (a health care provider) to advise the principal to make treatment decisions or to make decisions on behalf of the principal. It is assumed that the provider will be a good agent, matching professional knowledge with patient expectations to decide a decision the client will make based on that information. The concern with the principal agent occurs as the provider wants to promote his or her own interests, which in many situations do not correspond with the desires of the client.