Question

What are some examples of potential "principal-agent" problems in the health care industry? Why are such issues relevant to our class?

Answer 1

The principal-agent problem in health care asserts that providers, being the imperfect agents of patients, will act to maximize their profits at the expense of the patients' interests. This problem applies especially where professional regulations are lacking and incentives exist to directly link providers' actions to their profits, such as a fee-for-service payment system.

Some examples of the Principal Agent Problem in the Health care industry are : (1) private providers being able to induce demand by prescribing more drugs than public providers for a similar illness and patient profile; (2) private providers prescribing injection drugs to gain trust among the patients; and (3) patients' education as a source of information and empowerment has enabled them to mitigate the demand inducement by the providers.