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Explain how managed care contracts change agents' incentives to control costs. What agency costs are eliminated and what new ones are created?

1. For question 1 refer specifically and directly to attached Mclean c 2
2. For question 2 refer specifically and directly to attached Mclean c 3

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1. Explain how managed care contracts change agents' incentives to control costs. What agency costs are eliminated and what new ones are created?

2. Evaluate the following assertion: "We know they're a good, sound outfit. Look, their auditor signed off on their financial statements."

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1. Explain how managed care contracts change agents' incentives to control costs. What agency costs are eliminated and what new ones are created?
Managed care contracts change the agents' incentives to control cost because they have their own interests that take precedence over those of the hospital. For example, Dr. Jackson wants PCI to take a huge loan from a big Dallas bank and open an outpatient-imaging center. If PCI makes a profit then it should continue with this center otherwise it should walk away from the project and hand over the assets to the Bank. Dr. Jackson says that there is no additional risk but every loan brings with it a risk. So, the lure of extra profits by the shareholders is changing the incentives of PCI to control costs. In this case the agency cost is the extra interest cost that PCI will incur. In other words, the shareholders are using their position to extra leverage the assets of the company. What is happening is that the agent is turning selfish. A physician orders ...

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Two thorough paragraphs for each. Concise. Clear.

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