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

Martin Gaynor, Nirav Mehta and Seth Richards-Shubik ()

No 27172, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D86 H51 I11 I13 I18 L14 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-hea, nep-ias and nep-ore
Note: EH IO PE
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