Two-Sided Information Asymmetry in the Healthcare Industry

Abstract

The healthcare sector is one of the largest industries in most countries. It is also an outstanding case for a multi-tier system of the participating parties’ incentives and their conflicting interests. This paper focuses on a few of the multifactorial interrelationships between the different actors in healthcare services. The novel approach of this paper is the assumption of double-information asymmetry between the transacting parties that describes the actors’ relationships more realistically than the traditional principal-agent models. It will be shown that any system of incentivization may only apply perverse incentives in this case. Notably, efficient, high-quality healthcare units will be punished while less efficient and lower quality ones will be rewarded for their accomplishment. The theoretical analysis is supported by facts regarding Central and Eastern-European countries. Some symptoms and causes of the current decline can also be found in advanced West European countries and even in the United States. They are closely related to the ill-designed regulatory systems of publicly funded healthcare in these countries.