Final paper, the agency theory a conceptual approach, and a general review of empirical studies in health care organizations.

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Understanding the organization is not an easy task, however it is very important. …

Understanding the organization is not an easy task, however it is very important.
The design of an organization is an important task for the one who decide to start a new business or establish order in one existent enterprise.
The framework of reference can be sometimes difficult to understand, sometimes the leader of one organization instinctively follows the model most known by him (e.g. bureaucratic model), even though when the chosen model is already outdated, and the outcomes is predicted as undesirable in terms of optimization for our organization.
Other situation can occur in understanding the evolution in the field of management and the models and theories that have been emerging in the last years are not easy to unify, so that it's why that to describe the evolution of how we understand the organization today can be complex and ambiguous, while changing the way we
understand an organization is multidimensional and nonlinear, otherwise, ideologies, beliefs and ways of seeing the organization differ in several aspects, as cultural, social, political, economical etc.
As a part of the knowledge that we have been acquiring during the last century in terms of the different views of the organizations from Adam Smith, Taylor and Fayol - to nowadays, it is clear that the focuses upon how the organization have differed from each perspective, from each field of economy, politic, sociology; After 50 years, the theories or model or organization have indicated several ways to approach or outlook the way how we understand the organization it self.
In this review it is going to address in a general approach of the agency theory, focusing specially in the agency theory, the principal - agent problem appointed sometimes as the most important element of "the principal-agent theory".
This review as well is intended to give a general boarding of several empirical studies allowing the understanding to this theory either with intention to show how the theory works in the relationship within health care organizations, giving some evidence to see this overview of the relation among the principal (manager) and the agent (employee).
The following review have a top- bottoms structure, from International Health Organizations, National Health Agencies, Insurance Agencies, until Hospitals, Health Professionals and its Patients.

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  • 1. understand an organization is multidimensional and nonlinear, otherwise, ideologies, beliefs and ways of seeing the organization differ in several aspects, as cultural, social, political, economical etc.The Agency Theory: Aconceptual approach, and a As a part of the knowledge that we have been acquiring during the lastgeneral review of empirical century in terms of the different viewsstudies in Health Care of the organizations from Adam Smith,Organizations. Taylor and Fayol - to nowadays, it is clear that the focuses upon how theAlexander Bermudez Rubashkyn. Taipei organization have differed from eachMedical University.School of Health Care Administration. perspective, from each field of economy, politic, sociology; After 50Introduction. years, the theories or model or organization have indicated severalUnderstanding the organization is not ways to approach or outlook the wayan easy task, however it is very how we understand the organization itimportant. self.The design of an organization is animportant task for the one who decide In this review it is going to address in ato start a new business or establish general approach of the agency theory,order in one existent enterprise. focusing specially in the agency theory, the principal - agent problem appointedThe framework of reference can be sometimes as the most importantsometimes difficult to understand, element of "the principal-agent theory".sometimes the leader of oneorganization instinctively follows the This review as well is intended to give amodel most known by him (e.g. general boarding of several empiricalbureaucratic model), even though when studies allowing the understanding tothe chosen model is already outdated, this theory either with intention to showand the outcomes is predicted as how the theory works in the relationshipundesirable in terms of optimization for within health care organizations, givingour organization. some evidence to see this overview of the relation among the principalOther situation can occur in (manager) and the agent (employee).understanding the evolution in the fieldof management and the models and The following review have a top-theories that have been emerging in bottoms structure, from Internationalthe last years are not easy to unify, so Health Organizations, National Healththat its why that to describe the Agencies, Insurance Agencies, untilevolution of how we understand the Hospitals, Health Professionals and itsorganization today can be complex and Patients.ambiguous, while changing the way we
  • 2. The  Incentives  and  the  Agency  Theory:     2   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  Development of the Agency Theory. additional value, being opposite this appreciation in the case of the seller orIn this theory according with the service provider, on this way bothdescriptions of the authors (Rummell, parties can be beneficiaries of theSchendel, Teece 1991) [1] is seen a interchange, as we know both of themcomplete rupture of the organization want to be beneficiaries; however thetheory, due that its object of study are situation can be different when thethe private organizations. This has product or service don not fulfilled forgiven to some author to describe this the payer.theory as a theory of the enterprise,within the theory of organization. The establishment of control it is an important element if we want to be sureThe Agency Theory has intended to if the contract is being kept during thestudy the different ways that we have to transaction, is not difficult to control aestablish a formal contract between the transaction of actives for goods, sinceagent, in this case the employee or we know the specifications of what weworker, and the principal, in this case are buying, furthermore we havethe manager or employer. experience and previous knowledge, however in the case of services, theThus as we have seen, it merges a control is not easy because usually werelation of "Agency" every time that an dont have enough information aboutindividual depends of the action of the what it is going to happen in the future.other, in short, the objective of thistheory is to determine, whether given The agency problem happens when: 1.certain hypothesis related to the The information of the agent actions ispersons, the organization and the hidden or is selected, 2. The actions ofinformation, which is the most efficient the agent are hidden or there is moralcontract to govern the relation principal- risk, with the desire of make notagent, taking into account the behavior observable the profit of each party ofof the agent. the transaction with the end of maximize the profit in detriment of theThe contract: In our society the division other party, these problems are oftenof the work and the interchange as a called as "Asymmetry in theregular part of our life are made information".through the contracts, a contract is acommon agreement that can be written Knowing this the establishment ofor oral. contracts based in outcomes, more that in the behavior allows to adapt theThe interchanges are possible because preferences of the agents toward thethere will be always different subjective preferences of the principal becausevalorations about a good or service, in the compensation as a element of theeconomy an important element is outcome make that each party breakcalled the consumers exceeding the tension between the own interestexpectation, this phenomena happen (asymmetric interest).when the person who buy or pay for agood or a service give a subjective
  • 3. The  Incentives  and  the  Agency  Theory:     3   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  Besides, the establishment of Eisenhardt examines the governanceinformation systems, have allowed to using the monitoring using trade-offthe principal being aware of the elements between horizontal (agent-behavior and the activities of the agent agent) and vertical control (agent-reducing the asymmetry in the principal).information and agent performance. Having knowledge of this disparitiesIn 1976 Jensen and Meckling [2] main that seems to occur in certaindevelopers of this theory described that enterprises in terms of the asymmetricthe agent will not always act in the best information, the principal must to knowinterests of principals, as the objective that not always his/her interest areof the principal is maximize the profit, it perfectly align with the employeesis the same situation in the case of the interest. The motivation can be anagents who tend to act in their own important element; the principal canbest interests. This case is a classical use different ways of compensation likestruggle of pulling the rope between the bonuses, promotions, improvement inemployee and the employer. work conditions, satisfaction of needs; as long as the interest of agent turnsPart of the development of this theory toward the principals objective.includes the price theory mechanismsand hierarchy mechanisms. The motivation appears to be as an important tool for organizations that canThe authors also refer the Agency be used to change the objectives of theCosts, Therewith to understand the agents, encouraging the corporativeadditional cost due to the Agency culture, the beliefs in the objectives ofProblem: the enterprise, the pride of working in team, among others, can be planneda) Cost of formalization, due to the as to many ways to reduce thedesign and redaction of the "Contract". differences among the objectives of theb) Cost of supervision. agent (the employee) and the principalc) Cost of guarantee. (employer). [4]d) Residual loss (As part of the adopteddecisions by the agent, showing Method and Findings.deflection in terms of what the principalwould have done in that situation). In order to get a wide overview of the Agency theory, the principal-agentIn the literature there are different problem, and the asymmetry in thefocuses around the compensation information in one organization waspolicies, the incentive alignment developed a bibliometric search usingconsider the different types of tradeoffs several databases.between behavior oriented (salary) andoutcome-oriented (commissions, equity The objective in the findings was get anownerships and other devices) empirical information about the relationcompensations (Eisenhardt 1989) [3]. of the strategic human resource management and the agency theory, and second, bring some empirical and
  • 4. The  Incentives  and  the  Agency  Theory:     4   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  theoretical information about three Human Resource (SHRM) byimportant elements of a health system, examining different lens, giving anthe patient and the health care different approach as usual, to SHRM,provider, the health care organization focusing in the Agency theory.and the international healthorganizations. As an important element in various of HRM it has yet to consider theThe general overview includes: The monitoring, as a element that ensurerelation principal/agent among the the enforcement of the contract. in thishealth actors and the asymmetry in the way this study was carried out overinformation, principal/agent problem, three forms of organizational control,including a top-bottom outlook as specially the CEO control, bureaucraticfollows: Agency Theory in international control and incentive alignment on firmHealth Care Organizations, The performance.Agency Theory and its importance inenhancing the quality in the hospitals, As we can see in this case we areand the Agency Theory as a important intending to understand the model ofkey element in the relation Patient - service provided by an individual in onePhysician. organization, how it was already explained, Eisenhardt [3] suggest thatUnderstanding the levels of control the Agency Theory can be moreand Agency Theory: evident where the outcome uncertainty is high, given this the authors of thisThe Article 1 [5] named "Agency study want to assess the IPO (InitialTheory Implications for Strategic Public Offering) firms, firms whit a wideHuman Resource Management: Effects range of risks, with a high degree ofof CEO Ownership, Administrative outcome uncertainty.HRM, and Incentive Alignment on FirmPerformance" developed in the Cornel Agency Costs and forms of monitoringUniversity ILR School in 1996, intendsto analyze several hypotheses on the The control of the activities of the agenteffects of the CEO (Chief Executive according with the theory can reduceOffice), the administrative HRM the conflict of interest that inevitably(Human Resource Management) and happen when the principal delegateincentive stock ownership on firm over the agent responsibility andperformance. authority.It is well known that human resource Agency cost include cost of monitoring,management nowadays has becoming binding and residual loss, the cost ofan important strategic partner within the monitoring are the cost implicit directlyorganizations, helping businesses to controlling the actions of the employeestransform and become more (agent), e.g. creating administrativecompetitive. functions as Human Resource (HR) department, hiring supervisors,This study primarily intends to show the implementing incentive systems;importance of analyzing the Strategic bonging cost arise and are present
  • 5. The  Incentives  and  the  Agency  Theory:     5   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  when the agent are required to ownership, the presence ofcontinue activities to establish their incentive stock options for allcredentials providing certain warranties employees will have a positiveto their employees; by last the residual effect on firm performance.loss is defined as the cost to theemployer when the outcome of theagent does not fulfill the (100%) of Methods: The study took a sample ofcompliance. 107 IPO non-financial companies. The sample characteristics were theThe monitoring cost is the element that following: in average 11,66 year old,the authors gave more interest, this around half of the firms were less thandue the fact, that the monitoring 6 year old, 25% of the firms in the(supervision) is one of the most sample had more than 500 workers.important element in HR departments. Most of the businesses were located in U.S.A. (24,1%).Agency theory says that theperformance improves when agency Independent variables: The CEOcost are reduced. in the case of large Ownership is an important element, inorganizations when the manager is the study they decide to measure thisseparate form control, or CEO variable after IPO not before; The logicdecrease ownership, agency cost says that "the higher is the ownershipseems to increase. the more direct will be the monitoring of the top manager over the employees"In this way the main objective is To assess this logic (quartiles) based ofminimize the monitoring cost by relying CEO ownership and ANOVAs,the manager monitoring within the work following this logic were done toforce using bureaucratic controls or understand the behavior, the firstincentive alignments systems. quartiles show to be more likely to haveHypothesis of study: an Administrative HRM function than the last two quartiles.The authors described threehypotheses: The bureaucratic control via administrative (the inclusion of HRM Table 1. Hypotheses to be tested executives) and Incentive alignment via incentive stock option, were the two last 1. CEO ownership will be positively independent variables. related to firm performance. Dependent variables: Were assessed 2. After controlling for CEO variables such, Stock price, economic ownership, the presence of a performance, sales and productivity, bureaucratic (or administrative) which are variables with certain level of HRM function will have a negative dependency in the firm performance. impact on firm performance. Control variables: Number of 3. After controlling for CEO employees, net profit.
  • 6. The  Incentives  and  the  Agency  Theory:     6   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  Results: The results for Hypothesis I that in terms of the relation Principal-(Table 1) showed that high levels of Agent in this case CEO and employeesCEO ownership enhance performance, there is information that the principal dothe used regressions to predict the firm not know about the agent work, thisstock price, sales and productivity, the information basically is the one thatrealized that the results had an reflect the effort, the agentambiguous outcome, only 50% of the performance, and the way to achievedata follow the hypothesis, as follows, certain objective, the principal do notCEO ownership had a positive impact know this information because thein sales in the years of (1990 -1992) agent manage this situation to self-but had a negative in other years, on convenience (Principal - Agentthe other hand CEO ownership showed Problem).negative effect of productivity and noeffect of performance. So in this case this Article point three main important elements used in theThe results for the Hypothesis II and III Agency Theory to solve the asymmetry(Table 1), showed an expected in the information, outcome of theoutcome, as long as the bureaucratic known "Principal - Agent Problem" Thecontrol (AHRM) affect negatively the Controlling using the CEO ownershipperformance and affect the future stock (direct), the use of Human Resourceprince, and the ISO (Incentives Stock Management and the use of Incentives.Plan) based in the stock behaviorpredict a future good price The study focused in IPO firms, usedperformance, in short, AHRM lead to the ANOVA multivariable way tonegative effects in the firm performance understand the behavior of severaland ISO lead to positive performance. variables, independent and dependents.This paper according with the authorshad the intention in contribute more to We can see according with the resultsthe knowledge in the Agency Theory of the hypothesis I, that there is anand the Human Resource Studies. inconsistency or there are variables affecting the firm performance in a non-As we already know, the Agency linear way, the authors explain thatTheory explain how the self-interest different levels of CEO ownership leadlead to have different behaviors in to enhance firm performance, but theirterms of being a Principal or an Agent, mixing findings, as how the CEOthe Principal as the leader of one ownership have a positive impact inorganization always will try to follow the sales, but negative in performance infirm or organizations objectives, with certain periods of time (1993-94) give athe higher profits as possible, it means, strong evidence that measuring theat the same time the agent will try to do performance of a complex IPO firmstheir jobs using the lowest cost possible can not be directly measured,for him in order to have a higher profit. whenever we know that the financial(in this case the cost in abstract terms world owns huge complexities, themeans lowest effort for the agent to linear thinking CEO ownership Lead toachieve the objective), is well known Firm performance is incorrect, we know
  • 7. The  Incentives  and  the  Agency  Theory:     7   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  each firm has different elements, forexample "Firm Strategy", is clear that Good working conditions, goodthis strategy can no be measured, only communication and healthy workingthe Stock Price, anyway as one environment can change the way as weindividual, each firm has its own see the agent (employee) outcome.behavior and its own environment, soin this way trying to fit the final outcome Not always the employee is responsibleof the firms with this model of for a bad outcome, sometimes therecontrolling agents would be are external and holistic variables thatinadequate, and maybe this is a we can no measure that can affect thelimitation that the agency theory owns. outcome and the behavior of our personnel.In terms of the study they used atelephonic survey interview, indirectly So is more evident that the Agencythey asked about this three types of Theory is simplistic whenever it focusesmodels used for controlling, They just in the way of controlling the agentfigured out that the last quartile in terms costs neglecting environmentalof CEO ownership had a non authentic variables.leadership more focused intransactional actions, so we will see an The Administrative HRM in the resultsunhealthy approach of the CEO over as was predicted for the authorsthe agents, that will affect the showed that AHRM had a negativemotivation and the working conditions effect on future firm performance. thenegatively. ISO (Incentives mechanism) had a positive effect on future firmThis is other weakness of the Agency performance.theory, in this case the authors didntmention in their discussion something Looking at this information and therelated to the agent motivation (in linear thinking it is probably that maybeholistic terms); we can identify the this behavior is not certainly accurate.Agency Theory as a new way to seethe employees in terms of The Incentive alignment is shown asperformance, controlling and viable form of directing the employeecompensations, but this theory remain actions even in absence of HRM, beingthe original thinking of the 70s about consistent with the Agency Theory; sothe Z and X theories which have a dual the ISO lead the employee easilyview of the employee in terms that they toward principal objective as well as theare un-efficient and efficient productivity was shown increased inemployees, the situation here is that firm with this policy of compensation, itusing the linear thinking we can not see maybe can happen in short periods ofthat the motivation, not only in terms of time (as the American way seems tocompensation can play an important work), or in short as a transactionalrole in the firm performance, the way, the security, and motivationmotivation can be wide scope, as we holistic elements shown in mid andcan understand that motivation in long terms can change the agentindividual terms is subjective. behavior in a positive way for the
  • 8. The  Incentives  and  the  Agency  Theory:     8   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  principal and the firm this is seen in Agent problem; we already know some(Japanese enterprises), in this case the of the controlling elements being usedfirm not always makes the employee in one organization, and as anhave as a final wish a huge wage, but important element in this paper, it isthey provide security, and other holistic important to provide a general andelements that lead the employee until macroscopic view of the Health Careself-satisfaction more than a simple Organizations and the Agency Theory,economic wages. so in the first part of this Top-bottomIn this case the employee follow the analysis, we will start studying theprincipals will, because its own will. Principal-agent problem in Health Care Systems (HCS).Knowing this, we have to understandthe importance of the leadership of the There are many methods to organizingPrincipal, and how to be and authentic a Health Care System, in the majorityleader, the one who with his/her of the cases the outcome is oriented inactions, without controlling elements the efficiency, as a element which use(Agency-Theory) lead the employees to to fail in our traditional understanding offollow a common objective. one HCS, the paper had as an objective examine the Agency TheoryThe Agency theory among National over three key elements in one HCSand International Health Care the raising of finance, the transfer ofOrganizations and National Hospital: funds to hospitals, and spending byA General Overview. hospitals.Examining the first relation Principal - Features of a Health Care Systems:Agent (National Health Systems and Universal access, Complexity andHealth Organizations) and the other uncertainty, Information difficulties,two relations (Hospital - Physician) and Market failure, Technological Progress(Patient - Physician). and Changes in demand.Article 2 [7]: Principal-agent problems The financing appears as an elementin health care systems: an international that link all these features described soperspective. University of Oklahoma, that is why they authors of this paper,year 1997 follow the study around these three key elements of financing.The study of The Agency Theory canbe multivariable, as long as we identify To describe who is the principal, andwho is the Principal and who is the who is the agent in this case may resultAgent we can conclude and know more complicated as is complex one healthabout this theory of organizations. System it self, however, this graph (fig 1) extracted from the original paper canIn this second report study, which is not give us a general understanding of howcertainly an empirical assessment is the author identifier the Principal 1 andintended to describe the health care the principal 2 in the complex chain ofsystems as a whole in one international value in one health care system.perspective, in terms of the Principal-
  • 9. The  Incentives  and  the  Agency  Theory:     9   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.   in which the clinician is involved as well). This paper argues that whoever system of fees for service is used it is likely influence the hospital behavior in a profound manner with incentives. Financial considerations should not distort the efficiency, but it is difficult to use a model in a system of payments that have as a result an efficient resource assignation. Several countries use mixture methods of payment, based in budgetaryFig 1. Relation among principal and agents flexibility related to fixed costs andamong health care organizations. variable costs of the honorariums (Germany, Netherlands andSo in this chart we can se how the Switzerland).(principal 1) is the one who raise thefunds for the health care system. The principal-agency relations in health(Governmental body, or insurance care (Jones and Zanola) [6] recallingagency) in a financial framework some elements of the Agency Theory(raising of finance, the transfer of funds the contract implicit or explicit is theto hospitals, and spending by hospitals. basic mean to overcome the asymmetry in the information, as wellThe hospitals can be considered the the control mechanism alreadydirect agents of principal 1. However, described in previous analysis, usingthe governing boards of hospitals these types of contracts we can lead tothemselves can also be considered as guarantee the basic offer, and containprincipals (principal 2), on the the risk for the misbehavior of themanagement side of the process, in the agent.sense that they must fund and controlindividual clinicians. The literature review done for the authors reveals that there are moreThe ultimate agents are therefore the studies and papers in Agency Theoryhospital operational managers and focusing in the relation Patient-doctors. In general the rewards of Physician, this can be completelythese are likely to be linked to understandable as long as that relationmeasures of process, or financial is the core in the role of the health caremeasures such as costs or revenues, system.the clinician as an agent may be theservant of at least two principals:   the To understand how the authorsfunder and the hospital, (later we will describe the agency, in terms of thesee other Principal Agent relationship HCS, the hospital, the physician and
  • 10. The  Incentives  and  the  Agency  Theory:     10   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  the patient, we draw in this way. (Table had lead to a rise in the US health care2) costs per capita (showing a misbehavior on behalf the agents Table 2. Principal - Agent involved in this system). Relationships in the Health Care System Regarding the complexity of the principal agent problem in health care Principal1 (Government health system, and given the conflict of bureau) - Agent 1 (Hospital). interest, knowing the experience of five health care systems (Austria, Germany, Principal 2 (Hospital)- Agent 2 United Kingdom, U.S.A. and The (Physician) "Both sides Netherlands) described in the article we agency" can understand different ways to handle the problem described by Principal 3 (Patient) - Agent 3 Eisenhardt [3] in its Agency Theory. (Physician) "Both sides agency" Is well known that one universal objective of all the HCS is satisfy theWe can see how the physician become real needs in health care in onea two side agent seeing that the objective population, this the maximumrelation that hold with the hospital and efficiency. Germany, Austria and Thethe patient is held in different ways, Netherland give an importance to theusing formal and informal, implicit and full coverage (universal access), theimplicit contracts. U.S. focus in the variety and diversity and the U.K. in the equity. In all theseAs incomplete agency relationship in HCS the control of hospital is a concernhealthcare can be present when: (1). given the three flows of funds, whichthe physician may commit mistake are crucial to ensure the control of theregarding the patient interest, (2) the total cost in health care, all the systemsphysician may lack perfect information are converging in have the physician asregarding the effectiveness of the the "Gatekeeper".treatment regime, (3) the physicianmay mislead the patient regarding the U.K. and U.S.A. have been using theeffectiveness of the treatment. incentives elements for Agent 1 in order to avoid excess in costs. ThereThe number 2 and 3 can be product of are a wide variety of schemes used forthe uncertainty but can be as well remunerate the hospital for additionalproduct of the opportunism, physician workload used in these HCS,can increase it income by pursuing one insensivity in short term to additionalcourse of action over another. workload (Netherlands, UK) to full recovery reimbursement. ProspectiveIn some health care systems the payment under DRG or fee-for-servicepatient have the freedom of choice, (Austria and Germany), theseThe physician behavior described in mechanism lead to bring a wide varietythe numeral 2 and 3 and the additional of incentives to hospital in relation tolack of financial control over physician
  • 11. The  Incentives  and  the  Agency  Theory:     11   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  the types of patients they seek to external benefits agreed between theadmit. pharmaceutical and physician).All this mechanism cannot be In my experience, the "Pharmaceuticalcompletely successfully implemented Sales Representative" - Physicianthere are not control mechanisms relationship is harmful, and have to be(bureaucratic control, incentive regulated, because it doesnt matteralignments) over physicians. how the incentive the hospital give to their physicians in order to reduce costAccording with my experience in the in health delivery if the incentive givenhealth field there is vision that is not for these Pharmaceutical laboratoriesbeing addressed in a correct manner. can be several times higher.The way as the author perceives therelation "Principal3 (Patient) Agent 3 In my country "Colombia" this activity is(Physician)" this is because we can not not well regulated, on the other handfulfill completely the Agency Theory, the price of the medications comparedwhereas the profit can be part of the to the world is rather high, so thismain concern of both parties, but the relationship have been harmful for thewelfare of the patient is not conditioned Colombian Health Care System andfor the patient in terms of the lowest have lead this system to a generalcost to enhance the profit somewhat crisis.the real concern of the patient is toachieve the welfare, so in this case Given this I jus wanted to describe awho has total control of the situation is new model of Principal-Agent Problemthe doctor, so the information that must to be analyzed in the future inasymmetry is quite. order to have evidence to show to our Health Bureau to regulate thisThis not holistic vision, make us to unhealthy relation.believe that the patient is moreconcerned with having lowest costs, As a conclusion of this paper, it iswithout having a clear vision of the important here to see as well, how theoutcome, which is not true, in most incentives have to be abolished, as acases the main concern of the patient mechanism of control over theis to achieve the complete wellbeing, physician, it is not an easy to knowso they act blind without any how, but, the change of theknowledge about the real cost of the preferences of the agent toward themedical judgment. principal objective without using external elements seems to be the bestSomething interesting that we can see tool, the shared profit can be used as ais reflected in some countries is the addressing element, but in complexrelation (3) where the pharmaceutical health care systems is unreal to havecompanies have an important role this mechanism, whenever the principalencouraging and promoting their become and agent and the self interestproducts on own behalf, inducing the as a selfish feature of the human beingphysician behavior (either through lack is always present.of knowledge, or economic interest by
  • 12. The  Incentives  and  the  Agency  Theory:     12   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  Anyway the increasing of the eligible to be assessed, further, thosecooperation among physicians, and hospital which are offering short-term,health care providers reflect the desire general o another federal specialof solve the Principal - Agent Problem services and those hospital whichthrough the behavior instead of according with the database in the lastcontractual means. five years have reported a quality performance.The Agency theory among Hospitalsand Physicians. In order to give a short overview is important to said that big purchasers asExamining the second relation Principal Medicaid and Medicare have- Agent (Health Organizations and implemented the "pay-for performance"Physicians) initiatives through changes in payment rules. In response to these externalArticle 3 [8]: Enhancing board oversight pressures the hospitals have hadon quality of hospital care: An agency implemented internal policies in ordertheory perspective, year 2012. to improve patient safety and general quality.Following the top-bottom analysis, as afirst part of the chain was explained the Knowing this and the importance of themultirole that play the National Bureaus quality in order to increase the profitof Health with the hospital, the Hospital according with the federaland the Physician and by last the requirements, the authors of this articlephysician and its patient., all the developed in 2011 four surveys overprevious relations in the Agency- those organizations, which hadTheory framework reported hospital-governing practices of quality and patient safety.In this outlook we are going to focusour attention in the relation intended in The medical staff has tremendousensure the quality of the hospital influence in the quality an theamong the Staff and the Physicians, in appropriate use of resources, in shortthis case the Quality is the Staffs or the board is responsible for the qualityPrincipals objective. (Physician as of care, and the medical staff isagent and the Staff hospital "Board delegated (operational responsibility).hospital" as the principal) The relationship between hospital andThe Staff objective is a required action medical staff is difficult to manage,that the Bureau of Health has set as because as we have seen in this casemandatory, as we can see this second the agency theory show us that eachrelationship among the Health Bureau party bill their services separately, as aand the Staff Hospital is a supra result of this both parties do not alignrelation principal-agent. well their financial incentives. Both have different economic goals andThis study was addressed over all hospitals in United Stateswhich according the criteria were
  • 13. The  Incentives  and  the  Agency  Theory:     13   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  Overcome this issue can be possible units for hearth attack, heart failure andas long as we facilitate the physician pneumonia (encompassing over 20leadership and involve them in quality measures).oversight The number hospital suitable to beProvide care can be complicated, the evaluated was around 445, which Itreated patients can be have a consider is a representative sample,enormous variety of diseases and which represent more than the 16,8%conditions, as well the treatment and of the population, so it is significant atprocedures can differ substantially so least statistically.that is why the outcome it self can benot only relate to quality of care, but After matching the data with the TGIalso to the patient current situation. and the CMS information, the authors developed a table containing the valuesAs we can see in this case, here for the surveys related questions toappear an important opportunity for quality performance, using the qualityasymmetry in the information; in order of measure of the process of care andto avoid this opportunity for the agent comparing it there is a relation amongwe need to monitor the the implementers or quality adoptersincome/outcome validating the and enhancing the process of care,information on hospital quality certainly after this it was evident theperformance. relative improvement in the process of care as a quality care measurementThe board should regularly check the unit in the hospital which implementedquality even hold management for or adopted quality performancemeeting specific quality and patient initiatives, however seven have enoughsafety goals, in short, the central issue statistical significance to make ain one hospital governance is about general conclusion about the results,accountability, governing board should these questions are the following onesaid to enhance the accountability: e.g. with its statistical significance in favoroverseeing physician credentialing, of enhancing the process of care oncequality committees, involving it was performed a quality of caremanagement and leadership of quality initiative, the statistical relevantissues. element are shown as follows; relative statistical significance (p<.05): (1)So in short this paper they developed a requires the hospital to report itsmethodology around those 4 surveys quality/safety performance to thedeveloped by the TGI (Governance general public, (2) requires major newInstitute) and the and the CMS clinical programs or services to meet(Hospital Compare Data), so the quality related performance criteria;objective was correlate the data the were strong statistical significanceidentified 13 questions which the (p<.01): (3) requires management toauthors found quality related with the base at least some of the hospitalsquality measures and the data from the quality goals on the "theoretical ideal"CMS focusing in the process of care e.g. zero central line infections, (4)using the general set measurement reviews quality performance measures
  • 14. The  Incentives  and  the  Agency  Theory:     14   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  using dashboards, balanced the actions of the agents, the first is thescoreboards, run charts, etc., at least involving the agent in the activequarterly to identify needs for corrective leadership, this incentive mechanismaction, and very strong statistical maybe it is not related to an economicsignificance (p<.001): (5) At most gain, but it can be related to a statusboard meetings, devotes a significant which increase the esteem in socialamount of time to quality acceptance, becoming this as aissues/discussion, (6) Both the board motivation tool over the physiciansand the medical staff are at least as actions.involved or more involved thanmanagement in setting the agenda for The second is itself the physicianthe board’s discussion on quality, (7)   status, because the actions and theHas a standing quality committee of the quality measures use to be related toboard. each doctor and specialty, so the score it is not only show by hospital, but alsoLooking at this information we can have by physician specialties, and we knowenough evidence to show how on the how important is the acknowledgmentelements which is central in agency for the doctors, whenever that theirtheory is playing an important role here, reputation should be maintained asthis element definitely is the monitoring, high as possible, because is not thethe monitoring as a mechanism of hospital which keep the patient, is thecontrolling the agent actions, however, doctor who by their actions remains ain this case we have a board hospital bond of trust with their patients, so aas principal and in a dual manner the change in perception of the patientsmedical staff as principal - agent, which about their doctor, or an affectation inmakes a little bit complicated this his professional reputation, could meanrelation, but if we understand the a huge cost for the doctor. (Sometimesmedical staff as a part of the irreparable).bureaucratic control over thephysicians actions can be explained as To complete the analysis of this article,the second part of the mechanism of it should be added that in this case thecontrol known to avoid the asymmetry shared governance, seems to be ain the information (principal agent mechanism that avoids the use ofproblem). human resources offices as bureaucratic mechanism which as wellSo as we can see the element (4) as can directly involve the activity ofthe first mechanism of control of the agents with the principals activities,principal over the agent; the elements this is translated in make agent turn(1) (2) (5) (7) as the second their actions toward the principalsmechanism described, bureaucratic objective, thus overcoming thecontrol, the incentive as a mechanism principal-agent problem.of align physician and staff hospitaldoes not appear to be clear After understanding the relationshipsimmediately, but I have recognize two established from the government,possible ways of reward of incentives health provider organizations, hospitalsthat can toward the principals objective and doctors, we reached the end point,
  • 15. The  Incentives  and  the  Agency  Theory:     15   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  the central and most important point in physician/agent, we are going to keepthe health care delivery, defined as well this understanding in order to provide aas the goal of the entire health value wide overview of two different ways tochain. "The patient". see this complicated relationship.But how to define the agency theory Therewith, the previous definitionfrom the perspective of the patient?, remark the relation is important, firstThis is not an easy task since there is the patient act as principal once thatthe patient who does not have the he/she sets the objective and theinformation (asymmetry in information), doctor as an agent whit his/herand certainly does not have direct knowledge become the decision makermechanisms of monitoring, only its own supposing that he is acting on behalf ofoutcome as a monitoring tool for the the patient and maximizing his/herprincipal (hospital). utility, we can see that the physician adopt a role congruent with theThus we see how the physician or patients provider from both opticsHospital - Patient, is an agent. The issue comes when we try to define the utility between agent and patientWith the desire of understanding these even when the interest of increase theirrelationships which are not well own profits doesnt be to clear as longdocumented in the literature, were as we do not see the relation betweentaken two studies, one focused on the health or wellbeing with profit.changes of information betweenpatients and medical group due to bias, Other part which is important to remarkand the incentives to doctors for health is the asymmetry in the information onpromotion as a mechanism to align the the patients preferences, in this point ifphysician interest with other principals the physician act against the patientobjective (health care provider). preferences imperfect agency will arise even when the doctor intends maximizeThe Agency theory among the patients utility.Physicians and Patients. Thus one source of incompleteness inExamining the third relation Principal - the agency relationship is that theAgent (Patient and Physician) provider may respond to an incomplete or biased perception of the patientsArticle 4 [9]: Agency in Health-Care: interest (Evans 1984) [10]Are Medical Care-Givers PerfectAgents? Bar-Ilan University - Israel, The suggestion for the analysis is thatyear 2007. the provider is not aware of the patients preferences.Defining the relations it is important,sometimes it is no easy to know who is So in this paper the authors intends tothe principal in one relation as the understand from agency theory thephysician - patient, the general patient preference pattern for maternityoverview define as patient/principal and ward attributes with the care-gives
  • 16. The  Incentives  and  the  Agency  Theory:     16   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  perception of these preferences and pursue the principals goal, if he/shethereby offers evidence for the does not have clear the principalsincompleteness of the agency objective a problem in achieve therelationship principals goal will appear.The methodology which is a novel So certainly the results as exampleexperiment in this field used a DCE shown: the first attribute in score for(Discrete Choice Experiment), patients was the professionalism of thedesigned to look at the impact of staff, the doctors thinks that for thedifferent attributes on the overall benefit patient the most important attribute isobtained from a particular good or type of room, more evident can not beservice (Lancaster 1966)[11] This this bias that the physician use to havetechnic uses hypothetical realistic over the patients, sometimes thescenarios which varies according with doctors have a bias underestimatingthe attributes, becoming a factorial the patient appreciation upon theiranalysis which is reduced in 16 professional skills.scenarios after managing the trade-offof the attributes, the DCE was carried This we can see how the agent has ain three stages (1) choosing the biased perception of the principal,attributes of the service and their therefore a perfect agency doesntlevels, (2) defining the experimental, (3) Implementing the DCE inthe hospitals objective, and by last (4) In general terms this paper intended toData analysis, employing random- give evidence about the bias in theeffects probit regressions. relation patient and doctor, however, it is not clear to see how the agencyUsing an complex equation, knowing theory works, as long as we do notthe scenarios, the possible changes understand how the patient as aamong one scenario A to one scenario principal and the doctor as an agent tryB and the changes in the utility, after to increase their own profits, evendoing the survey and the analysis over using the profit not in economic term, in323 women who were evaluated, the metaphoric situations "wellbeing" theresults were the following ones: The relation it is not clear at all. Anyway wemedical staff has a biased perception can see how the bias upon theof preferences of the women they are principals goal "Perceived goal" cantreating. affect the agent behavior and affect the outcome, in this case it its importantAccording with the ranking of attributes enhance the communication within bothusing to determine the preference of parties in order to overcome this barrierthe patients, and the preferences which which looks not to complicated as longthe physician think the patients have, it as the wages, and the economicwas completely evident that the benefits are not implicit in thephysicians do not know really the relationship.patients preferences, so in this caselooking at the patient as a principal, the Article 5 [12]: Principal Agent problemsagent even when he/she wants to in Health Care: Evidence from
  • 17. The  Incentives  and  the  Agency  Theory:     17   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  prescribing patterns of private providers revenue, affect theoretically the patient,in Vietnam. University of California, because each health provider will haveBerkeley, year 2011. more interest in increase the own profit increasing the number of hospitalIn the Article 4 we figured out how the services than pursue the patients goalrelation between the principal and the (real well being).agent can be affected by the biasedagent understanding about the The agency theory in this case isprincipals goal, even, when it is evident expressed when the patient appoints athe agent intend to be a perfect agent, physician or doctor to advice theor want to achieve the principals goal. principal in making decisions about treatment, according with theIn this article we are going to see this professionalism of the agent (doctor) isrelationship over other perspective, this expected that he is a perfect agent, soperspective is framed in the use of combing professional knowledge andeconomic incentives, related to the patients preferences he would haveincrease of the general expenditure in to determine the most suitable choiceoutpatients treated, action that lead to for the patient, however, the problemincrease the income of the private "principal - agent problem" describedhospital which reflect in the same way several times in this paper appearsincrease in the physicians revenue. once the provider chooses increase his/her own interest, which in this caseThis mechanism of incentive it is according with the incentive structure ininteresting in the way that is used by the private hospitals in Vietnam do notthe other principal (Private Hospital), to align with the patients interests.lead the agent (physician) to increasethe income of the hospital giving a We know why the problem ispercentage of the total income per presented, is because the asymmetryservice provided to each patient in the information. As in the previous(secundary Principal). article the doctor is who has a greater knowledge of the patient’s conditionWe know that due to the conflict that the patient has, due to theinterest the action to induce the complexity of the health and medicine,medication over the patient, selling the the information asymmetry between theproduct as a pharmacist during principal (patient) - agent, is moreconsultation is forbidden in Vietnam. severe than in other markets or organizations.But despite the legal framework, theregulation is weak, and it becomes The physician-induced demand is oftenmore evident in rural areas. referred as a common principal agent problem, in my experience as aThe incentive structure described pharmacist, I can say that is thisbefore where the physician encourage asymmetry in the information whichthe use of medications (injection) in lead the pharmaceutical laboratories toorder to increase to general cost of the do aggressive marketing campaigns onservice to increase the hospital/clinic doctors, using in some cases
  • 18. The  Incentives  and  the  Agency  Theory:     18   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  incentives alignment, which in some stronger in the private health carecountries is not well regulated. market than in the public health care market.In Vietnam the drug prescription anddispensing in the same time becomes The data were collected from themore complex, because the principal- Vietnam National Health Survey, fromagent problem can have more direct 158.000 patients, the key elements ofimpact. the survey was addressed in the question where was asked about if theThis behavior in all the perspectives is responden had incurred any illness andinadequate, because affect the user injury during the four weeks precedingexpenses, affect his/her health, and the survey, what severity and type ofcan lead to the irrational use of the illness, and wether the respondenmedications, in this case the had sought treatment.medications should not be used for thecondition presented by the patient, In order to do more easy to understandbecause in long term can affect his/her the variability in the data, the authorhealth, this in turn can lead to all sorts select only the patients with only oneof medical complications from condition which sough formal medicalmicrobiological resistance, to assistance.unnecessary manifestation of adversereactions among others. From the 158.000 respondents, 63.406In order to understand this behavior reported having illness or injury overand realizing that, asses the provider- the four weeks, of this amount 53.299induced demand is easier to infer than had only one problem of health, andto prove the author developed the three only 28% of this amount of populationfollowing hypotheses: sought normal medical care, so the population of study was 12.300 Table 3. Hypotheses to be tested patients. 1. For a similar patient and illness Two outcomes of interest were profile, private providers prescribe included (number of medicines more drugs for each outpatient prescribed and dispensed in an contact than do public providers outpatient contact for curative care). 2. For a similar patient and illness So the objective as the hypotheses say profile, private providers are more is to evaluate how the outcome is likely to prescribe injection drugs in affected among providers (private), as an outpatient setting than are well looking at the differential effects public providers over different populations (educational background of the patient). 3. Highly educated patients both receive fewer drugs and are less The results were as they expected, a likely to receive injections than are concerning result is that 95% of the lowly educated patients. The effect consultation were sold medications, of the patients education is which is a concerning value about the
  • 19. The  Incentives  and  the  Agency  Theory:     19   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  weaknesses of the regulation over this background the asymmetry becomesmisbehavior, smaller which makes the patient be more aware of the physician decisions,The results shows that in average the affecting the physician behavior.number of medicines prescribed foreach of five health conditions and for As a conclusion of this article whicheach severity level separately, in all the was more focused in one relation shipcases described the private providers important for health care organizations,prescribed more medicines that any of than the organization itself, is importantthe public categories. e.g. respiratory to learn about how the incentives candisease, a contact with the private affect the agency according with theproviders entailed 4,11 drugs, and in perspective that we can see, in thispublic providers 3,88 (difference with case the physician behavior was turnstatistical significance). toward the private organizations goal, despite of the ethical issues which itThis pattern is repeated in medications incurs, as well we understood how thefor infections, injures etc. it shows that asymmetry of the information in thisthe private providers prescribe more case can be reduced once the patientdrugs per outpatient contact than do has higher literacy levels, reducing thepublic providers. asymmetry in the information.On the other hand an important The monitoring as a tool of control wasevidence appear seeing that the evident in the case of the Healthaverage number of medications for the Bureau of Vietnam, in this case vainlysame disease becomes higher in the office make regulation over patient,private hospitals located in urban and health providers in this cases inareas, in the agency theory order to avoid this misbehavior againstperspective, we can see how the the patient. This monitoring in othergovernment regulation (as Principal) in level of agency can be used for theurban areas can make a monitoring government as a mechanism to avoidover the double agent (hospital and that, health organizations act in owndoctors) in order to protect the Patient benefit more than the patients a recipient Principal. References.Moreover another evidence appears,related to the principal agent problem, [1] Rumelt R., Schendel D., Teece D.,in this case comparing the information Strategic management and economics,of the type of patients treated, the ones Strategic Management Journal, Volumewith lower education has a high 12, Issue S2, pages 5–29, Winter 1991.probability to receive moremedications, than the patients with [2] Jensen M., Meckling W., Agencyhigher educational status. Costs and the Theory of the Firm, Journal of Financial Economics, 1976.Recalling the asymmetry in theinformation, once the patient has health [3] Eisenhardt, K.,Agency theory: Anliteracy related to his/her educational assessment and review, Academy of
  • 20. The  Incentives  and  the  Agency  Theory:     20   A  conceptual  approach  and  a  general  review  of  empirical  studies  in  Health  Care  Organizations.  Management Review, 14, pp. 57–74 *[12] Ha Nguyen, Principal-Agent1989. Problems in Health Care: Evidence from Prescribing Patterns of Private[4] McMillan, John; Games, Strategies Providers in Vietnam, Stanford& Managers, page. 92.,New York: University, Walter H. Shorenstein Asia-Oxford University Press, 1992. Pacific Research Center Asia Health Policy Program, 2007.*[5] Welbourne T., Cyr L., AgencyTheory Implications for Strategic *Articles of central analysis.Human Resource Management: Effectsof CEO Ownership, AdministrativeHRM, and Incentive Alignment on FirmPerformance, Cornell University ILRSchool, Center for Advanced HumanResource Studies, 1996.[6] Jones A, Zanola R. Agency andhealth care, Centre for HealthEconomics, University of York, 1995.*[7] Smith P, Sephan A, Valdmanis V.Verheyen P, Principal-agent problemsin health care systems: an internationalperspective, Health Policy 41 37–60,1997.*[8] Jiang H., Lockee C., Fraser I.,Enhancing board oversight on quality ofhospital care: An agency theoryperspective, Health Care Manage Rev,37(2), 144Y153, 2012.*[9] Neuman S., Neuman E., Agency inHealth-Care: Are Medical Care-GiversPerfect Agents?, Institute for the Studyof Labor , IZA, Discussion Paper No.2727 April 2007.[10] Evans, R.G., 1984, Strainedmercy: The economics of Canadianmedical care (Toronto, Butterworths).[11] Lancaster, K.J., 1966, A newapproach to consumer theory, Journalof Political Economy 74, 132-157.