Economically speaking: Redefining the agency relationship | Paul Healy

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Paul Healy

Economically speaking is a series of blog posts that draw on basic economic principles to understand the challenges facing the NHS. Written by Paul Healy, senior economics adviser at the NHS Confederation, this latest post explores the agency relationship.

agency /ˈeɪdʒ(ə)nsi/ n. a person acting to produce a particular result, which is the basis for relationships in which an agent acts on behalf of a principal.

It is commonly suggested in health that ‘doctor knows best’, recognising the inherent confidence we have in professionals to diagnose and treat our medical conditions. The gap between the information held by those delivering healthcare and those on the receiving end of it is unavoidable, yet also desirable.

After all, public resources are spent educating and training NHS doctors and nurses, with estimates suggesting the economic costs at £550,000 per medical consultant and £70,000 per nurse. We therefore expect them to develop an expertise in health that will be used for our benefit. 

This defines an agency relationship, as it is termed in economics, in which health professionals act as agents for patients and mostly decide on their behalf what health services they need. A perfect agent is assumed to make choices that a principal – the patient – would make if they had the same information and professional knowledge.

There are dangers with this though, and moral hazards (another economic term) must be considered. The main moral hazard is the risk that health professionals might use a position of trust to induce over-consumption, specifically to increase income for them or their organisation. Conversely, it could be suggested that health professionals might seek under-consumption, if this enables costs to be reduced without affecting income.

It is, of course, uncomfortable to think of health professionals acting for any reason other than their patients’ best interests, let alone for income maximisation. For the most part, these hazards seem to exist more in theory and, as can be common in economics, may not always reflect practice on the frontline, at least within a healthcare setting. 

Nonetheless, there are numerous financial incentives in place that seem to depend on an assumption that professionals in the NHS do, to a certain extent, behave in this way. 

Take, for example, the marginal rate for emergency admissions within the national tariff. This has been in place for the last six years to reduce the price paid for increased emergency activity above a certain baseline and is grounded in a belief that a reduced price will discourage hospitals from taking on extra activity, regardless of whether or not it is needed. 

Similar thinking lies behind recent proposals to change how outpatient follow-ups are reimbursed, with the rationale being ‘to create a strong incentive on providers to reduce unnecessary attendances.’ The inference from both is that providers are currently allowing attendances or admissions that are unnecessary and thus not in the interest of the patient, or the principal.

The NHS Confederation asked doctors and nurses how far financial incentives impact on their clinical behaviour. The responses were mixed, although 36 per cent did suggest there was some influence. One important reason why financial incentives might not be influencing the decisions of NHS professionals, as was also shown in our survey, is the fact that very few doctors and nurses are even aware of the incentives being there.

We can rightfully challenge, then, that the NHS has a ‘principal-agency problem’ linked to financial incentives, yet a question remains about whether NHS professionals can always act as perfect agents. Significant progress has been made to broaden the definition of quality of care to recognise  the importance of patient experience, of which patients are likely to hold more information than their agent.

Furthermore, studies highlight that when patients are offered greater choice in their treatment, they will often choose fewer interventions than commonly assumed. This is the impetus behind the Choosing Wisely initiative, led by the Academy of Medical Royal Colleges, which recognises that patients in the NHS are being offered treatments with only minor benefit and the potential for substantial harm. 

The intention will be to single out interventions that routinely deliver questionable value and encourage a discussion between patients and their health professionals to decide whether the treatment is necessary.

Armed with this understanding, the NHS will be in a good place to move away from the academic interpretation of the agency relationship, towards shared decision-making and people-powered healthcare. Often, this has been labelled as ‘nice to have’ and would rarely feature in a discussion about NHS finances, nor in an economic blog series.

Yet analysis is developing to prove that redefining the role of patients in the NHS could have a substantial impact on improving sustainability in the NHS. Patient groups are working hard to show the benefits of engaging people in their own health, such as in the Realising the Value programme, which up to now has gone unnoticed and unmeasured.

The emerging case will be crucial in redefining the general relationship between the public and their NHS, which could even unlock the public debate on what it is worth and how much we’re willing to pay for it.

Paul Healy is a senior policy adviser on economics and regulation at the NHS Confederation. Follow him and the organisation on Twitter @NHSConfed_PaulH @nhsconfed

Health economics 101

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