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

This paper argues that common-agency problems may impede efficient contracting between insurers and providers. We find that common agency can lead to a coordination failure when incentive contracts aim to elicit organizational innovations involving lumpy investments or fixed costs. This coordination failure leads to an inefficient equilibrium in which contracts offer no incentives at all. Our results have specific implications for healthcare policy. Interventions such as Medicare's ACOs ameliorate the common-agency market failure in two ways: by subsidizing investments by providers and by jumpstarting more efficient contracting by private payers.