Measurement of the marginal benefit of medical services on health status is difficult. Individuals cannot purchase health per se from providers but instead purchase medical services to improve or maintain health. From the standpoint of society, preventative medical services such as vaccinations provide a much greater marginal benefit than do more expensive, more technologically intensive interventions. Once vaccination and basic health services are provided, overall health is positively affected more by factors such as diet, exercise, and smoking than by the advancement of sophisticated technological procedures. Public policy relating to the optimal amount of medical care that should be provided to individuals is a complex question.
Information asymmetry exists between buyers and sellers in the medical care market. Providers are well informed about the services they deliver, but consumers often find it difficult to secure information about particular medical services. For physicians, hospitals, and other providers to provide full information to consumers is costly, and providers tend to provide only essential information relative to a particular medical treatment. Consumers, without medical training, find it difficult to understand or evaluate various alternatives even when information on alternative treatments is available. Evaluating alternatives includes consideration of service quality, measured by criteria such as the success rate of the treatment, the degree of invasiveness of the procedure, or the length of recovery time. In addition, the need to gather and analyze information usually occurs when the buyer is ill, putting the consumer even more at an informational disadvantage. A partial solution to this is found in the general practitioner who serves as an advisor to patients determined to need non-routine medical treatment.
Information asymmetries also exist with respect to the price of medical services. Consumers generally have limited incentives to be well informed about the price of medical services because third parties (government, employers, or private insurers) pay for most medical services. Even when consumers attempt to price and compare services, it is often difficult to determine in advance the total cost of services. Physicians themselves may not have financial incentives to be well informed about prices if their income is unaffected by the quantity or quality of services delivered (e.g., salaried physicians). Information asymmetries, associated with understanding the nature of the medical treatment and comparing prices of alternative treatments, all constrain price rationing and efficient purchase of medical care.
Private health insurance markets are particularly vulnerable to adverse selection. Individuals have a great deal more information about their individual health status and likely need for medical services than do insurers. This informational disadvantage to insurers frequently results in adverse selection. Information on individual health status is relatively expensive to obtain, adverse selection occurs when individuals with higher than average health risks seek insurance and insurers, unaware of their risk levels, fail to charge an adequate premium by classifying them inaccurately. As a result, adverse selection leads to individuals with lower risks subsidizing those with higher risks. Ultimately, low-risk individuals buy less than full insurance coverage or withdraw from the insurance pool entirely because coverage is too expensive given their good health status. Minimizing the impact of adverse selection underlies basic contract design and company underwriting processes relating to health insurance coverage.