Journal of Health Politics, Policy and Law 26.5 (2001) 1055-1068
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Intermediate Organizations as Triple Agents
University of Chicago
In "Uncertainty and the Welfare Economics of Medical Care" (1963), Kenneth Arrow focused on the physician-patient relationship, which was by far the most important relationship in U.S. medical care at that time. With the development of managed care, "intermediate organizations" began to impinge on this formerly sacrosanct dyad, interacting in a complex web of relationships with patients, physicians, and one another (Figure 1). These organizations--including Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), large medical groups such as Independent Practice Associations (IPAs), Physician-Hospital Organizations (PHOs), accreditation organizations such as the National Committee for Quality Assurance (NCQA), and large public and private purchasers of health insurance--function as double agents or, more often, as triple agents (at a minimum).
A health plan, for example, is an agent not only of patients, but also of purchasers, regulatory agencies, and accrediting organizations in addition to having its own interests. While all these organizations are supposed to represent patient interests, it is by no means certain that they will do so (Rodwin 1995). Whose interests does an intermediate organization that is a triple agent serve?
In this essay, I suggest that managed care has significantly increased uncertainty for patients and physicians while decreasing uncertainty for purchasers and payers (Table 1). These differential effects help explain [End Page 1055] both why managed care is unpopular (Blendon et al. 1998) and why it has continued to grow despite its unpopularity. I also suggest that intermediate organizations have the potential to decrease uncertainty--even for patients and physicians--more effectively than was possible in the traditional, fee-for-service-based system about which Arrow wrote.
For patients and physicians, uncertainty creates fear and dissatisfaction. For economists, uncertainty is a source of market failure, especially when combined with information asymmetries between buyers and sellers. 1 At the extreme, uncertainty can prevent the very existence of a market (Akerlof 1970); 2 more commonly it interferes with exchange and [End Page 1056] with productive efficiency. But "uncertainty in medical care" is too broad a concept. What kind of uncertainty is meant, and for whom? It is useful, I suggest, to distinguish three types: patient uncertainty about the ability to afford care; patient, purchaser, and payer uncertainty about the quality of care; and purchaser and payer uncertainty about the cost of care.
Part 1 of this article briefly discusses uncertainty in medical care during the indemnity fee-for-service era about which Arrow wrote. Part 2 discusses ways in which intermediate organizations decrease purchaser and payer and increase patient and physician uncertainty in the contemporary U.S. managed care system. Part 3 discusses the potential of intermediate organizations to reduce uncertainty for patients in addition to purchasers and payers and briefly indicates market and nonmarket measures, which might help them do so.
Physician Professionalism as a Remedy for Market Failure Caused by Uncertainty
Arrow translated Talcott Parsons's functionalist analysis of physician professionalism (Parsons 1954) into the economic language of market failure. In Arrow's view, the "nonmarket social institution" (947) of physician professionalism was a means of compensating for uncertainty in the context of the severe information asymmetry that existed between physicians and patients and between physicians and corporate purchasers of and payers for medical care (health insurance companies). Though neither patients nor purchasers or payers had sufficient information to evaluate physicians' actions, physician professionalism was supposed to enable patients to trust that they would receive only appropriate services and that the quality of these services would be high, and purchasers and payers to trust that these services not only would be appropriate and of high quality, but that they also would be provided at a reasonable cost. Arrow argued, in other words, that physician professionalism could reduce two of the three forms of uncertainty: patient and payer uncertainty [End Page 1057] about the quality of care and payer uncertainty about the overall costs of care.
During this pre-Medicare...