Multilateral Contracting and Prevention

A major factor in the cost of the U.S. healthcare system is related to the strategic behavior of system participants based on their incentives. Contracts may be used to align incentives in such distributed systems. We consider an insurer contracting with two agents, a consumer and a provider. We focus on the trade off between ex ante moral hazard and insurance, and consider both consumer and provider incentives to solve the problem of optimal contracting in the presence of unobservable preventive efforts. We consider two classes of efforts on behalf of the provider: those which would complement consumer efforts, and those which substitute with consumer efforts. Our results show that the provider must be given incentives when the consumer is healthy to induce effort, and that inducing provider effort allows an insurer to save on incentives given to the consumer. The insurer can save informational costs by using a multilateral contract compared to the bilateral benchmark. We provide an illustrative example showing which model features affect the overall savings that the multilateral contract achieves