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Optimal Contracting with Altruistic Agents: Medicare Payments for Dialysis Drugs

  • Martin Gaynor
  • Nirav Mehta
  • Seth Richards-Shubik
American Economic Review
vol. 113, no. 6, June 2023
(pp. 1530-71)
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Abstract

We study health-care provider agency and optimal payments, considering an expensive medication for dialysis patients. Using Medicare claims data we estimate a structural model of treatment decisions, in which providers differ in their altruism and marginal costs, and this heterogeneity is unobservable to the government. In a novel application of nonlinear pricing methods, we empirically characterize the optimal contracts in this environment. The optimal contracts eliminate medically excessive dosages and reduce expenditures, resulting in approximately $300 million in annual gains from better contracting. This approach could be applied to a broad class of problems in healthcare payment policy.

Citation

Gaynor, Martin, Nirav Mehta, and Seth Richards-Shubik. 2023. "Optimal Contracting with Altruistic Agents: Medicare Payments for Dialysis Drugs." American Economic Review, 113 (6): 1530-71. DOI: 10.1257/aer.20210208

Additional Materials

JEL Classification

  • D64 Altruism; Philanthropy; Intergenerational Transfers
  • D86 Economics of Contract: Theory
  • H51 National Government Expenditures and Health
  • I11 Analysis of Health Care Markets
  • I13 Health Insurance, Public and Private
  • J33 Compensation Packages; Payment Methods
  • L21 Business Objectives of the Firm