Sticking Points: Common-Agency Problems and Contracting in the U.S. Healthcare System

We propose a "common-agency" model for explaining inefficient contracting in the U.S. healthcare system. In our setting, common-agency problems arise when multiple payers seek to motivate a shared provider to invest in improved care coordination. Our approach differs from other common-agency models in that we analyze "sticking points," that is, equilibria in which payers coordinate around Pareto-dominated contracts that do not offer providers incentives to implement efficient investments. These sticking points offer a straightforward explanation for three long observed but hard to explain features of the U.S. healthcare system: the ubiquity of fee-for-service contracting arrangements outside of Medicare; problematic care coordination; and the historic reliance on small, single specialty practices rather than larger multi-specialty group practices to deliver care. The common-agency model also provides insights on the effects of policies, such as Accountable Care Organizations, that aim to promote more efficient forms of contracting between payers and providers.