Information Asymmetries

Information Asymmetries Information asymmetries are common in healthcare markets and create a number of problems. An information asymmetry occurs when one party in a transaction has less information than the other party. In this situation, the party with more information has an opportunity to take advantage of the party with less information. Recognizing a disadvantage, the party with less information may become skeptical of the other party’s motivation and decline a recommendation that would have been beneficial. For example, physicians and other healthcare providers usually understand patients’ medical options better than patients do. Unaware of their choices, patients may accept rec- ommendations for therapies that are not cost-effective or, recognizing their vulnerability to physicians’ self-serving advice, may resist recommendations made in their best interest.

From a manager’s perspective, asymmetric information means that providers have a great deal of autonomy in recommending therapies. Because providers’ recommendations largely define the operations of insurance plans, hospitals, and group practices, managers need to ensure that providers do not have incentives to use their superior information to their advantage. Conversely, in certain situations, patients have the upper hand and are likely to forecast their healthcare use more accurately than insurers. Patients know whether they want to start a family, whether they seek medical attention whenever they feel ill, or whether they have symptoms that indicate a poten- tial condition. As a result, health plans are vulnerable to adverse selection, meaning that high-risk consumers are more likely to seek insurance whereas healthier individuals are more likely to go without.