Physician Agency, Compliance, and Patient Welfare: Evidence from Anti-Cholesterol Drugs JOB MARKET PAPER

Physician agency is an important issue in health economics, but its welfare implications are not well studied. I examine agency problems in the market for anti-cholesterol drugs. Since doctors write prescriptions but patients decide whether to fill them, I separately examine initial prescriptions and compliance decisions to infer doctor and patient drug preferences. I show that initial prescriptions respond to physician financial incentives and to pharmaceutical detailing, but compliance does not, pointing to agency problems. To further understand the mechanisms and welfare consequences of agency, I implement a structural model of doctor-patient interactions. The model estimates imply that fully eliminating agency would increase compliance by 17 percentage points, raise patient welfare by 25% of drug spending, and keep total spending constant. But the model also indicates that partial reform—eliminating some but not all aspects of agency—is not necessarily welfare-improving, and can both raise drug expenditures and lower patient welfare and compliance. For example, eliminating cost-control incentives reduces patient welfare slightly, but increases drug spending markedly, suggesting that insurers are setting incentives effectively. ∗Extremely preliminary; comments welcome. The Wharton School, University of Pennsylvania, [email protected]. This project has benefitted enormously from regular discussions with my committee, Mark Duggan, Jean-Francois Houde, Bob Town, and especially Uli Doraszelski and Katja Seim. I thank Jeremy Tobacman for help in gaining access to the Marketscan databases. I am grateful to Dr. Stephen Gottlieb and Dr. Sarah Miller for providing helpful detail about prescribing anti-cholesterol drugs. I acknowledge financial assistance from a National Science Foundation Graduate Research Fellowship. All errors are my own.