Healthcare Economics Harvard Case Solution & Analysis

Healthcare Economics Case Solution

The relationship of principal and agent is pervasive in our economy—e.g., stockholder and manager of a company, seller (or buyer) and real-estate broker, client and lawyer, etc.  List and discuss at least three reasons why the principal-agent relationship is different in health care?

 In addition, use at least one specific health care example in your answer.

 The relationship of principal and agent is often referred to as the agency relationship. It is the relationship between the agent and principal, which reflects that agent is the person or the team who takes the decisions on the behalf of principal, who is often referred to as the subject. The principal is also referred to as the person with very little knowledge, and the agent is a well-informed individual. The principal-agent relationship in the health care is that the general practitioner is referred to as an agent and the patient is a reference to principal. Another principal-agent relationship is found in the health care, which is between the medical team as an agent and the management of the hospital as the principal.

The principal-agent relationship in health care is different from other industries. The first difference occurs on the dependence of principal on agent, as he/she has either no knowledge or very little knowledge. The principal has very little knowledge of the operations, and he/she fully reliant on the agent.

The agent has more knowledge of medical systems and diagnoses. The agent might refer the principal for unneeded diagnoses. The lack of medical knowledge on part of the principal depletes the principal from the ability to evaluate the performance or the quality of the treatment. Even the patients have no knowledge of the situation that whether the agent is making decisions in favor of principal or not.

The second difference occurs in the payment consideration. In other cases, the payments between the agent and principal are fixed whereas in the case of health care, there is no fixed amount set for the services. The agent (medical practitioner) might refer the principal (patient) diagnoses in order to maximize his/ her profits and the profits for the health care center.

The more the days a patient spends in the hospital, the more profits the health care center would gain and the more diagnoses tests suggested by the doctor will lead the patient to pay more than normal. Wrong decision by the doctor in terms of maximizing his or her own interest might lead the condition of principal to a critical level.

The third difference in the principal-agent relationship lies in the utility functions. The utility or the service function in other industries is assumed independent and both the agent and principal tend to increase their own profits. While in the case of health care, the utility function of both parties (agent and principal) are interdependent.

The actions and decisions made by general practitioner (agent) are mostly in the interest of patient (principal). The agent is responsible for the identifying the needs of the principal and provide the best treatment in order to recover patient’s health quickly. The agent is responsible for maximization of the utility function in his/her interest and the interest of the principal.

Vietnam faces conflicts in the principal-agent relationship. Lack of the regulations in the Vietnam lead doctors to charge more for the diagnoses and prescribe expensive drugs, which are of no use. These drugs are prescribed only to maximize profits for private drug store vendors.................

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