Lessons from Game Theory about Healthcare System Price Inflation

Abstract

Background

Game theory is useful for identifying conditions under which individual stakeholders in a collective action problem interact in ways that are more cooperative and in the best interest of the collective. The literature applying game theory to healthcare markets predicts that when providers set prices for services autonomously and in a noncooperative fashion, the market will be susceptible to ongoing price inflation.

Objectives

We compare the traditional fee-for-service pricing framework with an alternative framework involving modified doctor, hospital and insurer pricing and incentive strategies. While the fee-for-service framework generally allows providers to set prices autonomously, the alternative framework constrains providers to interact more cooperatively.

Methods

We use community-level provider and insurer data to compare provider and insurer costs and patient wellness under the traditional and modified pricing frameworks. The alternative pricing framework assumes (i) providers agree to manage all outpatient claims; (ii) the insurer agrees to manage all inpatient clams; and (iii) insurance premiums are tied to patients’ healthy behaviours.

Results and Conclusions

Consistent with game theory predictions, the more cooperative alternative pricing framework benefits all parties by producing substantially lower administrative costs along with higher profit margins for the providers and the insurer. With insurance premiums tied to consumers’ risk-reducing behaviours, the cost of insurance likewise decreases for both the consumer and the insurer.