Incomplete information issues pervade health care markets, with market participants often having relatively little information, and their behavior exhibiting corresponding aberrations from classic market behavior. Consumers often have relatively little information about prices and quality offered in health care markets, leading to substantial dispersion in prices of apparently identical services. Equilibrium price dispersion increases as the demand elasticity for the product falls. Since health insurance lowers the elasticity of demand, price dispersions should occur more often (and with greater magnitude) in markets such as physician services with relatively complete insurance. Further, many insurance plans blunt incentives for search, compounding the problem. On the supply side, evidence shows that physicians behave as if they did not share the same information about the productivity of medical care. At the level of geographic regions, numerous studies show the rates at which various medical interventions are used on standardized populations differ hugely – often by an order of magnitude or more from high to low – and these differences in treatment rates do not converge through time as would occur in standard market learning models. Similarly, individual physicians within a given region also display differences in the propensity to use medical resources. Information from a major study of doctors’ “styles” shows large and statistically significant differences in doctors’ use of medical resources to treat their patients, even with strong measures of illness severity of the patients included in the models. Although requiring strong assumptions, one can estimate the welfare losses arising from incomplete information on the provider side of the market. Estimates of the upper bound of these welfare losses place the magnitude of loss in the same range on a per capita basis as the traditionally emphasized welfare losses associated with perverse incentives in health insurance. The importance of incomplete information leads to discussions of the economic and legal incentives for the production and dissemination of information. Legal incentives to produce such information for medical strategies (treatment protocols) are weak, particularly compared with the incentives in markets for specific products such as prescription drugs. The public good nature of such information and the government role in supporting its production and dissemination form the concluding parts of this chapter.
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