UC Berkeley

Health care organizational structures support alternative combinations of payment and nonprice incentives for physicians, hospitals, and other providers. Changing perceptions among purchasers of the relative effectiveness of particular mechanisms lead to changes in the market shares held by particular organizational structures. This paper uses principal-agent and transactions cost economics to develop a conceptual matrix for understanding organizational innovation in the health care system. It contrasts the differing incentives in retrospective versus prospective payment mechanisms, arms-length review versus peer review mechanisms for controlling inappropriate utilization, and "free choice of physician" versus selective contracting mechanisms for structuring the basic insurer-provider relationship.