Nova workboard

a blog from young economists at Nova SBE

Effects of asymetry of information and agency relations on demand: Portuguese approach

The health sector is characterized for having singular market behaviors, especially when it comes to the increasing monopoly effect and other aspects related to this issue. This way, the purpose of this comment is to understand how the imperfect information influences the relationship between doctors and patients and what the implications behind these asymmetries are. All examples given will use Portugal.

Starting with the imperfect information, it is intuitive that, most of the times doctors possess more information than patients. As a result, they can take advantage of this factor in several ways, more particularly in terms of the prices practiced at their private clinics. Taking as an example Lisbon and Vila Real, the range of prices practiced in private clinics is completely different. This situation lead us to take some conclusions. First of all, Lisbon being the capital of Portugal with a population of approximately 545.000, has a huge number of health services available. On the contrary, Vila Real is a small city in the north of Portugal and has only a population of approximately 207.000. Therefore, private clinics placed there are present in a smaller number. With this, some questions arise:  Where are higher prices being charged? Why is that happening?

According to the empiric analysis of Pauly and Satterthwaite (1981), the lack of information about suppliers’ price and quality leads to a practice of higher prices. It happens because people are not able to compare so easily doctors in bigger cities than in smaller ones. Taking again the example of Lisbon and Vila Real, it would be stated that in Vila Real health care services have more affordable prices when compared with Lisbon. The latter has a wider variety of private clinics and so it is difficult to compare within health services. On the contrary, in a smaller city such as Vila Real, word-of-mouth provides people such an effective way to communicate and become better informed which reduce the market power of each doctor. Another aspect that should be stated is the fact that in Lisbon people are more inelastic to prices (less price sensitive) while in Vila Real people are more price sensitive.

It is also relevant to talk about the income effect model. It basically says that doctors avoid diminishing their income levels by creating additional demand for their services and by increasing their prices. Unfortunately, in this model patients cannot do anything (they have a passive role) and so they have to accept the imposed modifications.

This way, one of the implications of imperfect information is the agency relations. Doctors are the ones who delegates decisions and sometimes their interests do not coincide with the patients’ ones. As a result, economic factors may lead to some relationships tensions. Recently, recalling a Portuguese example, was reported[1] that some Portuguese doctors were being investigated for having diverted patients from public hospitals to private ones. Here we are presented with a clear economic interest from the doctors’ perspective. One of the reasons that explains why that happened is due to the fact that remunerations at private hospitals are higher than in public hospitals, which encourages doctors to take this kind of actions without taking into consideration their medical ethic code and patients’ interests. In order to avoid these situations, Portuguese government implemented tighter legislation[2]. This way, among other reasons (e.g.  Avoid some effects in waiting lists) they can promote greater transparency about conflict of interests.

As it can be seen, information asymmetry and agency relations in health care services are difficult to separate apart from each other. They are intimately related and should be very carefully evaluated, taking into account issues such as the ones mentioned above. They have a huge impact on doctors’ life as well as in patients’ life.

Ana Paula Pereira, #1606

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Author: studentnovasbe

Master student in Nova Sbe

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