A:

Agency problems vary from health care system to health care system, and not all economists agree on the degree and desirability of agency issues in the health care field. The most traditional interpretation of the American health care industry is consumers and employers, or the "principals" in economic terminology, are sending huge sums of money to health care providers, or the "agents", without being able to control costs or care quality.

This is particularly true for health insurance. Comparative international studies from the United States, the United Kingdom, Australia, Germany, Sweden and China have shown that doctors invariably write much more expensive prescriptions for patients with insurance. U.C. Berkeley professor Fangwen Lu called this the "differential agency problem hypothesis" after an analysis in 2011.

The Problem of Third-Party Payments

If you are like most Americans and get some or all of your health insurance coverage from your employer, you are less likely to shop around different insurance companies or different hospitals for the best deals. This is entirely rational; after all, your employer options are limited and it does not matter which hospital you go to if the insurance is picking up most of the tab.

This is exactly the problem, at least in the U.S. In the 1940s, the U.S. government instituted wage and price controls on companies. Unable to bid for better labor with salary, employers began offering new benefits, such as employer-based health insurance. Eventually, the IRS made this kind of health insurance fully tax deductible to the employer; wages are not fully deductible, so it is better for the company to pay a dollar in health care than in salary.

Unfortunately, the forces of the market do not work when nobody competes on price. Hospitals do not have any real incentive to disclose how much procedures cost up front, and consumers do not shop for health care like they would for groceries or a new car. This provides an opportunity for the agents to increase the cost of care in a way that is not advantageous for the principals or anyone else.

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