Information Asymmetry

Why information is unevenly distributed

Information asymmetry exists when people or organisations involved in the same economic decision do not have equal access to relevant information. The imbalance may concern health status, treatment quality, clinical knowledge, expected risk, costs, behaviour or the likely consequences of a choice.

The better-informed party may use its informational advantage strategically, but inefficient outcomes can arise even without deliberate deception. The central problem is that the less-informed party cannot fully observe or verify something important before or after making a decision.

Where information asymmetry appears in healthcare

Healthcare contains several persistent information gaps. Patients usually know more about their symptoms, preferences and adherence than clinicians or insurers, while clinicians know more about diagnosis, treatment options and likely outcomes than patients.

Important examples include:

• A patient cannot fully judge the quality or necessity of a recommended treatment.
• An insurer cannot perfectly observe an applicant’s underlying health risk.
• A clinician cannot fully observe whether a patient will follow a treatment plan.
• A purchaser cannot directly observe every aspect of provider quality or effort.
• A regulator may know less about a medicine’s development evidence than its manufacturer.
• A patient may know less about prices, alternatives and provider performance than the organisations supplying care.

Information asymmetry can therefore exist in more than one direction. The identity of the better-informed party depends on the decision and the information being considered.

Hidden information and adverse selection

Hidden information exists when one party possesses relevant characteristics that another party cannot adequately observe before an agreement is made. In insurance markets, people often know more about their expected healthcare needs than insurers do.

This can produce adverse selection. People expecting high healthcare costs may be more likely to seek generous coverage, while people expecting low costs may decide that the same premium is poor value. If lower-risk people leave the insurance pool, average costs and premiums may rise, potentially causing further withdrawal.

Adverse selection concerns information or characteristics that exist before the agreement. It should not be treated as a synonym for every problem involving insurance or unequal information.

Hidden action and moral hazard

Hidden action exists when behaviour occurring after an agreement cannot be perfectly observed or enforced. Insurance may reduce the price paid by a patient at the point of care, while insurers cannot fully determine whether every service used was necessary or how behaviour changed because coverage was available.

This can contribute to moral hazard, including:

• increased use of healthcare because insurance lowers the patient’s direct cost;
• reduced preventive effort when some financial consequences of illness are insured;
• provider recommendations that are difficult for patients or purchasers to evaluate; and
• behaviour that cannot be fully specified or monitored in a contract.

Moral hazard does not imply immoral conduct. In economics, the term describes how incentives and behaviour may change when one party does not bear or cannot observe all the consequences of an action.

Principal–agent relationships

A principal–agent relationship arises when one party delegates a decision to another party with greater expertise or information. In healthcare, a patient may rely on a clinician to recommend care, an insurer may contract with providers, and a government may commission services from healthcare organisations.

The arrangement becomes problematic when the agent’s objectives differ from those of the principal and the principal cannot fully observe the agent’s actions or reasoning. Payment systems, professional standards, clinical guidance, reporting requirements and oversight mechanisms can help align incentives, but they cannot remove every information gap.

Consequences for markets and decisions

Information asymmetry can prevent prices, contracts and choices from accurately reflecting quality, risk or value. Its effects depend on which information is missing, who holds it, whether it can be verified and how strongly incentives differ.

Possible consequences include:

• inefficiently high or low use of healthcare;
• poor matching between insurance coverage and risk;
• difficulty rewarding high-quality providers;
• supplier-induced demand;
• mistrust between patients, clinicians, insurers and manufacturers;
• higher monitoring and contracting costs;
• reduced competition based on quality; and
• market failure when private decisions do not produce an efficient outcome.

Information asymmetry is one possible cause of market failure, not a synonym for market failure itself. Evidence is needed to establish whether the information problem is large enough to materially affect outcomes.

Ways of reducing the information gap

Responses to information asymmetry aim to improve information, make quality or behaviour more observable, or change incentives. The appropriate response depends on the source of the imbalance and the costs of correcting it.

Common approaches include:

• licensing, accreditation and professional regulation;
• informed-consent requirements and shared decision-making;
• standardised evidence and reporting requirements;
• publication of prices, quality indicators and treatment outcomes;
• independent health technology assessment;
• insurance mandates, risk adjustment and regulated enrolment rules;
• contracts linking payment to observable activity or outcomes;
• monitoring, audit and utilisation review;
• clinical guidelines and decision support;
• warranties, guarantees and performance standards;
• screening, through which the less-informed party designs choices that reveal information; and
• signalling, through which the better-informed party provides credible evidence of quality or type.

These measures can improve decisions but also create administrative costs, reporting burdens and unintended incentives. More information does not automatically produce better outcomes if it is unreliable, difficult to interpret or selectively disclosed.

Information asymmetry in economic evaluation

Economic evaluation depends on evidence supplied by researchers, manufacturers, clinicians, patients and healthcare systems. These parties may hold different information and may face different incentives concerning data generation, analysis and disclosure.

Analysts should consider:

• whether all relevant evidence is available;
• whether study sponsors possess unpublished information;
• whether outcomes and comparators were selected transparently;
• whether model assumptions can be independently examined;
• whether patients and decision makers can understand the evidence presented;
• whether conflicts of interest are disclosed; and
• whether independent validation or evidence synthesis is required.

Transparency, methodological standards and independent review help reduce information asymmetry, but they do not guarantee that every relevant uncertainty or unpublished result has been identified.

Interpreting information asymmetry carefully

The existence of unequal information does not by itself establish that regulation or another intervention will improve welfare. Analysts must compare the likely benefits of reducing the information gap with implementation costs, compliance burdens, privacy concerns and possible unintended effects.

A careful assessment asks:

1. Identify what information is unevenly distributed.
2. Determine which party holds the informational advantage.
3. Establish when the information gap occurs.
4. Examine how the gap changes incentives or behaviour.
5. Measure its effects on cost, quality, access, efficiency or equity.
6. Compare feasible responses and their consequences.
7. Test whether the proposed response creates new information or incentive problems.

The policy objective is not perfect information, which is rarely attainable. It is to reduce consequential information failures enough to support better decisions and more efficient or equitable outcomes.