<scp>Insurance in a Market for Credence Goods</scp>

TLDR

In a regulated credence‑goods market, physicians act as experts and, owing to their informational advantage, may cheat by inflating treatment levels to overcharge patients. The study examines how varying the degree of insurance, specifically the proportional coinsurance rate, affects fraud levels and the incentive structures of patients and physicians in the physician‑patient relationship. The authors analyze the effects of changing the proportional coinsurance rate on the incentive structures of patients and physicians. The results show that a higher coinsurance rate can either reduce fraud and lower patients’ likelihood of seeking second opinions, or increase fraud and prompt more searches.

Abstract

Abstract We study the impact of variations in the degree of insurance on the amount of fraud in a physician‐patient relationship. In a market for credence goods, where prices are regulated by an authority, physicians act as experts. Due to their informational advantage, physicians have an incentive to cheat by pretending to perform inappropriately high treatment levels leading to overcharging patients. Our approach aims on the impact on changes in each, patients' and physicians' incentive structure when the proportional degree of coinsurance varies. It is shown that a higher coinsurance rate may lead to either less fraud in the market and a lower probability of patients searching for second opinions or more fraud and more searches.