chapter  11
36 Pages

Contracts and asymmetric information

In previous chapters we have argued that supply, demand, and financing of health care services involve three types of agents: patients who do not decide upon the service they receive, nor pay for it; providers who demand a service that they do not consume and are paid by a third party who does not consume the service demanded either; and insurers who pay for a service that they do not consume. These links across consumers (patients), producers (providers), and payers (insurers) appear because the level of information available to the agents differ. For instance, the insurance company has less information on the health status of the individual contracting health insurance than the individual themselves. In fact, the separation between receiving a service and paying for it has given rise to the term third-party payer that is unique to health care. In a similar vein, the patient has less information about his or her health condition than the physician after proper examination and diagnosis. We refer to this phenomenon as imperfect information. In turn, these information asymmetries imply that agents cannot decide by themselves. Instead, they have to delegate the decision to another (better-informed) party. Accordingly, there appears an agency relationship. Finally, to implement those cross-links, contracts are signed to guarantee as much as possible that the deciding party does its best to pursue the interests of the other party. The study of how to design these contracts, and what incentives have to be provided to the parties involved is the domain of the economics of information. Macho-Stadler and Pérez-Castrillo (2001) present a complete analysis of the elements of the economics of information. The interested reader may also see Folland et al. (2009, Chapters 9 and 10).