The design of a health-care system concerns matters of information and strategy at several points. The users—potential and actual patients— have better information about their own state of health,...

The design of a health-care system concerns matters of information and strategy at several points. The users—potential and actual patients—

have better information about their own state of health, lifestyle, and so forth—than the insurance companies can find out. The providers— doctors, hospitals, and so forth—know more about what the patients need than do either the patients themselves or the insurance companies. Doctors also know more about their own skills and efforts, and hospitals about their own facilities. Insurance companies may have some statistical information about outcomes of treatments or surgical procedures from their past records. But outcomes are affected by many unobservable and random factors, so the underlying skills, efforts, or facilities cannot be inferred perfectly from observation of the outcomes. The pharmaceutical companies know more about the efficacy of drugs than do the others. As usual, the parties do not have natural incentives to share their information fully or accurately with others. The design of the overall scheme must try to face these matters and find the best feasible solutions. Consider the relative merits of various payment schemes—fee for service versus capitation fees to doctors, comprehensive premiums per year versus payment for each visit for patients, and so forth—from this strategic perspective. Which are likely to be most beneficial to those seeking health care? To those providing health care? Think also about the relative merits of private insurance and coverage of costs from general tax revenues.