Asymmetric Information and The Production of Health

University dissertation from Department of Economics

Abstract: The common theme of this thesis is the analysis of asymmetric information when applied to the market for health care production. The thesis consists of six more or less independent papers and an introduction to the thesis were purpose and methodology are stated (part one). Part two is an investigation into the pricing of pharmaceuticals in Sweden. This chapter deals with issues such as cost sharing for consumers, incentives for R&D, the principles for reimbursement of costs and the regulation of consumer prices. The policy conclusions are that if the state limits its role in price-regulation to the truly high-cost treatments and substances, a sufficiently high high-cost protection scheme will make price sensitivity large enough to put a downward pressure on the prices of most other pharmaceuticals. Part three is a theoretic model about how incentives for development of new pharmaceuticals can be maintained through pricing policy and public subsidies for development of drugs (after a patent is granted). The model is set for a closed market and builds on the idea that there is a trade-off between consumer surplus and incentives for the development of quality of the drug. An expansion is then made for a setting where the regulator is uncertain about the efficiency of the drug manufacturer in development of the drug. Part four of the thesis is an introduction to previous theory of reimbursing hospitals. This part deals with issues such as unobservable quality, yardstick competition and the agency theories of health economics. The agency theory builds on a notion that physicians control quality in treatments. Physicians may also be put under pressure from hospital management to shirk on quality. The setting is thus a situation of "double agency", with conflicting interests of physicians. Part five is a combined model of the agency theories of health economics and the regulatory theory of Laffont & Tirole. The model starts with a situation where the only uncertainty is about the quality of treatments. This basically turns out to be the agency model of Ellis & McGuire (1986), where the optimal reimbursement is a blend of cost reimbursement and fixed payments. Then, I allow the providers to be technically inefficient. They can thus exert effort to decrease the cost of treatments. It then turns out that the optimal reimbursement tilts towards fixed payments, away from cost reimbursement. Finally, I also allow for uncertainty about the efficiency of the providers from the payers' point of view. The result is then that cost reimbursement in general is more advantageous, but also that different cost sharing arrangement for different types is the optimal solution. Generally, less efficient providers get a larger proportion cost reimbursement and providers that are more efficient get more of fixed payments. Part six is a development of the model i part five. In part six I concentrate on explaining the economic rationale of dividing patients into different diagnosis related groups according to their diagnosis at admittance and thus also according to the expected cost of treatments. The economic role of outlier rules (cost limits above which cost reimbursement is used) is explained and principles for the construction of homogeneous resource use groups and optimal outlier rules are derived. Part seven is mainly a formalisation of the theories of Burton Weisbrod about the non-profit firm and its economic rationale. Here I use the agency theory of Ellis & McGuire and the ratchet principle, as formalised by Weitzman, to construct a theory about the behaviour of not-for-profit hospitals, compared with their for-profit counterparts.

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