The design of the health care system involves issues of information at several points. The potential users (patients) are better informed about their own state of health and lifestyle than insurance companies. The health providers (doctors and hospitals) know more about what patients need than do either the patients themselves or the insurance companies. Health providers also know more about their own skills and efforts. Insurance companies have statistical information about outcomes of treatments and surgical procedures from past records. The drug companies know more about the efficacy of drugs than do others. As is usual, the parties have different interests, so they do not have a natural inclination to share their information fully or accurately with others.

a. From this perspective, consider the relative merits of the following payments schemes:

i.) A fee for service versus capitation fees (e.g. hourly wages) to doctors.

ii.) Comprehensive premiums per year versus payment for each visit for patients.

b. Which payments schemes above are likely to be most beneficial to the patients and which to the health providers?

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