Since Kenneth Arrow (1963) first addressed the issues of asymmetric information in health insurance, several authors discussed the impact of asymmetric information on the quality and costs of medical services. (See, e.g., Ellis and McGuire (1986), De Fraja (2000), Chalkley and Malcomson (2002) and Siciliani (2006)). However, their papers focused on one-sided asymmetric information between physicians and their patients, or between healthcare institutions (hospitals) and the healthcare funding agency. As is well-known from the literature, one-sided asymmetric information in a transaction will result in a welfare loss and in a loss of cost efficiency. (See, e.g., Laffont and Martimort (2002)). Should regulators apply cost-based regulatory tools rather than incentive-based methods, the loss becomes even larger. (See, e.g., Major and Kiss (2013) on cost-based pricing in regulated industries, especially in telecommunications.) This loss can be reduced, but it cannot be fully annihilated even by incentive-based regulation either.
The novel approach of my paper is that I assume and discuss double information asymmetry between the transacting parties that describes the actors’ relationship more realistically than the traditional “Principal-Agent” models. I shall prove that any system of incentivization may only apply “perverse incentives” in this case. Notably, the efficient, high-quality healthcare units will be punished while the less efficient and lower quality ones will be rewarded for their accomplishment.
I shall extend the previous theoretical analysis by using examples from Central and Eastern-European countries, first of all the case of Hungarian healthcare. Some of the 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. In the empirical analysis, I focus on the ownership structure and the regulatory system of healthcare in CEE countries and I show the impact of the institutional setup on their cost-efficiency and performance. This data comes from Eurostat, the World Health Organization, and the Organization for Economic Co-Operation, and Development.