Contract, Warranty, and the Patient Protection and Affordable Care Act

Abstract

You can allay fears that your car transmission will fail by purchasing a 10 year/100,000 mile powertrain warranty, but you cannot purchase a warranty against your surgeon botching your appendectomy, or even leaving a sponge in your body. Patients typically lack the information to judge doctors’ skills, and doctors do not use contractual methods, such as warranties, to signal their skills and estimates of their treatments’ risk.

This unsolved information asymmetry causes the inefficiencies endemic to healthcare, equaling an estimated $700 billion a year or 1/3 of all annual U.S. healthcare costs. The new health care act offers a bureaucratic solution, aiming to mandate efficient “best practices” through Medicare, Medicaid, and other government reimbursement mechanisms. But by fixing a set of treatments, bureaucratic solutions confine the exceptional doctor to the mediocre standard and fail to reward innovation.

A better solution which would encourage innovation and empower doctors to credibly convey their treatment’s urgency and risk so that patients could decide “best practices” for themselves. Warranties would permit doctors to signal this information. While doctors could not warrant all treatments given the limits of medical knowledge, they could warrant treatment with known risks. The proposed warranties would vary with the factors driving this risk, i.e., doctor skill and condition complexity. The warranties could range from “I’ll administer this drug” to “Your broken arm will be fixed.” Warranties properly align incentives by rewarding success. Doctors already offer warranties for eye surgery and fertility treatments.

Legal barriers also limit access to and development of credible information about physician performance. Professional protectionism, aligned with law and regulation, conspire to hide information about price, past performance, disciplinary history, and treatment practices. Removing regulation’s muzzle on doctor quality information, and encouraging or requiring doctors to warrant treatments, empower patients to make informed assessments of treatments without the costs of bureaucratic mandates.

Keywords: healthcare, contract, agency