Information asymmetry, insurance, and the decision to hospitalize

• Published in: Journal of health economics 2005-07, Vol.24 (4), p.775-793
• Main Authors: Blomqvist, Ake, Leger, Pierre Thomas
• Format: Article
• Language: English
• Subjects: Asymmetric information; Canada; Capitation; Cost sharing agreements; Decision Making; Demand functions; Economic models; Health administration; Health economics; Health insurance; Health professionals; Health services; Hospitalization; Humans; Insurance; Insurance Coverage - classification; Managed care; Managed Care Programs; Mathematical methods; Medical care; Models, Econometric; Patient Education as Topic; Patient Participation; Patients; Physician-Patient Relations; Physicians; Primary care; Sick people; Singapore; Specialist care; Studies
• ISSN: 0167-6296; 1879-1646
• DOI: 10.1016/j.jhealeco.2004.12.001

We analyze the problem of second-best optimal health insurance in the context of a model in which patients and doctors must decide not only on an aggregate quantity of health services to use in treating various kinds of illness, but also have a choice between different kinds of providers (in particular, outpatient services rendered by primary-care physicians or inpatient services provided by hospital-based specialists). We consider well-informed patients’ choices of provider when they have conventional insurance so they only pay part of the cost of their health services, as well as the equilibrium strategies of doctors and patients when there is patient-provider asymmetry; in the latter case we also analyze a managed-care insurance setup under which doctors are paid by capitation. We find that under certain plausible conditions, second-best optimal managed-care plans with supply-side incentives dominate second-best optimal conventional plans that rely on cost control through demand-side cost sharing.