Who is Principal and Who is Agent?

Despite frequent media coverage, and attempts by policymakers to regulate how some U.S. citizens are insured, healthcare costs within the U.S. continue to increase.  The Center for Medicare and Medicaid Services (CMS) reports that in 2016 the U.S. spent 3.3 trillion dollars on healthcare services which is a 4.3 percent increase from the prior year.[i]   The question policymakers, large employers, and insurers are struggling with is how to decrease the costs of care without also decreasing the quality of care in the U.S.[ii]

An alternative approach to addressing this issue may lie in the management perspective of those leading large healthcare networks.  The majority of healthcare organizations in the U.S. are non-profit[iii] and, therefore, must have a community-based mission statement and show community benefit.  Hospitals, like other large organizations, have many stakeholders.  These stakeholders, just to name a few, include: patients, physicians, operational staff, support staff, insurance organizations, and patient families.  The stakeholders often have competing goals.  For example, the physician’s main focus may be to efficiently treat their patient’s diagnosis in a thorough manner, while the senior leadership of the organization may desire to treat as many patients as possible so as to have a larger impact on the community and also make the organization financially sustainable.

This goal conflict among stakeholders is why some researchers believe agency theory principles are not optimal within non-profit organizations (Steinberg, 2008).[iv]  Agency theory attempts to align the goals/ interests of an individual (agent) with that of the organization or a stakeholder group (principal).[v]  Simply put, within healthcare, who should the agent (in this case, the physician) be trying to please?  This example can be applied to many stakeholder groups within healthcare.  So, what is the potential resolve?  It is possible that in order for the U.S. to address the rising healthcare costs, we, as a nation, must all share a common perspective in regards to what level of care should be provided and what that means for all stakeholders.

[i] Centers for Mediare and Medicaid Services (CMS). (2017). NHE fact sheet: Historical NHE, 2016.  Retrieved from https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nhe-fact-sheet.html

[ii] Brot-Goldberg, Z. C., Chandra, A., Handel, B. R., & Kolstad, J. T. (2017). What does a deductible do? The impact of cost-sharing on health care prices, quantities, and spending dynamics. The quarterly journal of economics, 132(3), 1261-1318. doi: 10.1093/qje/qjx013

[iii] Cordery, C., & Howell, B. (2017). Ownership, control, agency and residual claims in healthcare: Insights on cooperatives and non‐profit organizations. Annals of Public and Cooperative Economics, 88(3), 403-424. doi: 10.1111/apce.12156

[iv] Steinberg, R. (2008). Principal-Agent theory and nonprofit accountability. Retrieved from https://ideas.repec.org/p/iup/wpaper/wp200803.html

[v] Caers, R., Bois, C. D., Jegers, M., Gieter, S. d., Schepers, C., & Pepermans, R. (2006). Principal‐agent relationships on the stewardship‐agency axis. Nonprofit Management and Leadership, 17(1), 25-47. Retrieved from http://www.wiley.com

Leave a Reply

Your email address will not be published. Required fields are marked *