Optimal Contracting with Altruistic Agents: A Structural Model of Medicare Payments for Dialysis Drugs

59 Pages Posted: 18 May 2020

See all articles by Martin Gaynor

Martin Gaynor

Carnegie Mellon University; National Bureau of Economic Research (NBER); Leverhulme Centre for Market and Public Organisation

Nirav Mehta

University of Western Ontario - Department of Economics

Seth Richards-Shubik

Lehigh University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 2020

Abstract

We study physician agency and optimal payment policy in the context of an expensive medication used in dialysis care. Using Medicare claims data we estimate a structural model of treatment decisions, in which physicians differ in their altruism and marginal costs, and this heterogeneity is unobservable to the government. In a novel application of nonlinear pricing methods, we theoretically characterize the optimal unrestricted contract in this screening environment with multidimensional heterogeneity. We combine these results with the estimated model to construct the optimal contract and simulate counterfactual outcomes. The optimal contract is a flexible fee-for-service contract, which pays for reported treatments but uses variable marginal payments instead of constant reimbursement rates, resulting in substantial health improvements and reductions in costs. Our structural approach also yields important qualitative findings, such as rejecting the optimality of any linear contract, and may be employed more broadly to analyze a variety of applications.

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Suggested Citation

Gaynor, Martin and Mehta, Nirav and Richards-Shubik, Seth, Optimal Contracting with Altruistic Agents: A Structural Model of Medicare Payments for Dialysis Drugs (May 2020). NBER Working Paper No. w27172, Available at SSRN: https://ssrn.com/abstract=3603802

Martin Gaynor (Contact Author)

Carnegie Mellon University ( email )

H. John Heinz III School of Public Policy
and Management
Pittsburgh, PA 15213-3890
United States
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Leverhulme Centre for Market and Public Organisation

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Nirav Mehta

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

Seth Richards-Shubik

Lehigh University - Department of Economics ( email )

620 Taylor Street
Bethlehem, PA 18015
United States

HOME PAGE: http://www.lehigh.edu/~ser315

National Bureau of Economic Research (NBER) ( email )

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