Question

The health care system has many participants: health care providers, pharmaceutical companies, individuals as patients, individuals as tax payers, insurance companies, employers, and the government. Consider the possibility of a new treatment for an illness. What incentives do the different participants have with respect to adopting and implementing this treatment? When do these incentives create inefficiencies due to factors such as moral hazard or adverse selection? Explain how these incentives depend on the nature of the treatment (for example, does it work quickly or slowly, is it inexpensive or very costly, is it reliable or uncertain in its effectiveness, etc.) and on the nature of the health care system (is there managed care or fee for service, how does the insurance system operate, etc.).

Answer 1

The incentives participants have with respect to adopting and implementing this treatment are:

• Health care providers: if the treatment is successful the demand for their treatment will increase and they will be provided monetary incentives
• pharmaceutical companies: profits will increase and also their market share
• individuals as patients: providing low cost and effective treatment   
• individuals as tax payers: subsidies by government so that they have to pay less taxes
• Insurance companies: if treatment will be effective and cheap it will reduce their burden to bear the treatment expenses.
• Employers: bonus and other monetary incentives to motivate to provide better facilities
• The government: improvement in health and increase in welfare will encourage government to provide various incentives to different participants.

These incentives create inefficiencies due to factors such as moral hazard or adverse selection when the treatment is not effective or it is not provided properly to the right patient.

These incentives depend on the nature of the treatment if the treatment works quickly the pharmaceutical companies will get incentives for making an effective treatment, if the treatment is costly government will give incentives to patients to afford the treatment, if it is uncertain in its effectiveness than it can reduce the incentives and if the treatment is reliable in its effect it will increase the incentives. The incentives also depend on the nature of the health care system. Suppose government provides cheap health care services it will increase the incentives and if the services are costly than it will reduce the incentives for providers, companies and also for patients and the incentives is also affected by the flexibility and rates of insurance systems.