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NHS contracts: An agency approach

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  • Rosella Levaggi

Abstract

The White Paper Working for Patients has produced dramatic changes in the organization of health care in the UK that will soon be followed by analogous reforms in other countries. The core of the reform is represented by the separation of the responsibility for purchasing health care from providing the services. The creation of this internal market is said to enhance efficiency, but some peculiar characteristics of health care prevent a Pareto optimal solution being reached. This paper describes the purchaser‐provider relationship using an innovative principal agent model to assess the relative merits of the different forms of contracts. The model is also used to show how competition among providers allows the purchaser to extract this private information. From a theoretical point of view, the approach is innovative in the formulation of the principal's objective function; the interesting finding is that the presence of a stringent budget constraint alters both the risk‐sharing conditions and the First‐best contract proposed by the literature. From a policy point of view, the paper explains why in the first wave over 75% of contracts between purchasers and providers were block contracts. It is also demonstrated why this contractual form should be avoided.

Suggested Citation

  • Rosella Levaggi, 1996. "NHS contracts: An agency approach," Health Economics, John Wiley & Sons, Ltd., vol. 5(4), pages 341-352, July.
  • Handle: RePEc:wly:hlthec:v:5:y:1996:i:4:p:341-352
    DOI: 10.1002/(SICI)1099-1050(199607)5:43.0.CO;2-7
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    References listed on IDEAS

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    1. Rees, Ray, 1985. "The Theory of Principal and Agent: Part 2," Bulletin of Economic Research, Wiley Blackwell, vol. 37(2), pages 75-95, May.
    2. Harris Milton & Townsend, Robert M, 1981. "Resource Allocation under Asymmetric Information," Econometrica, Econometric Society, vol. 49(1), pages 33-64, January.
    3. Rees, Ray, 1985. "The Theory of Principal and Agent: Part 1," Bulletin of Economic Research, Wiley Blackwell, vol. 37(1), pages 3-26, January.
    4. Demski, Joel S. & Sappington, David, 1984. "Optimal incentive contracts with multiple agents," Journal of Economic Theory, Elsevier, vol. 33(1), pages 152-171, June.
    5. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
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    Cited by:

    1. Rosella Levaggi & Moretto Michele, 2008. "Investment In Hospital Care Technology Under Different Purchasing Rules: A Real Option Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 60(2), pages 159-181, April.
    2. Elin Johanna Gudrun Hafsteinsdottir & Luigi Siciliani, 2010. "DRG prospective payment systems: refine or not refine?," Health Economics, John Wiley & Sons, Ltd., vol. 19(10), pages 1226-1239, October.
    3. Rosella Levaggi, 2007. "Regulating internal markets for hospital care," Journal of Regulatory Economics, Springer, vol. 32(2), pages 173-193, October.

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