Incentives for Voluntary Disclosure of Quality Information in HMO Markets

ABSTRACT This study examines incentives for voluntary disclosure of quality information by health maintenance organizations (HMOs). Economic theory predicts complete voluntary disclosure without mandatory rules. This article introduces plans' selection motives to avoid high-risk consumers as a deterrent of full unraveling; if disclosure is expected to attract high-risk members, plans have incentives to withhold information. The empirical analysis shows that while market unraveling was an important mechanism to bring disclosure, it was not complete, and plans in markets with high-risk consumers were less likely to disclose. This study suggests that market unraveling may not arise if risk selection incentives are prevalent. INTRODUCTION Imperfect information has long been identified in health care markets (Arrow, 1963): consumers do not have as much information about health care needs as providers do and consumers cannot easily observe quality of individual providers. As potential problems associated with imperfect information are recognized, policies that disclose relevant information have been promoted. The information disclosed often includes quality measures that would otherwise be unobservable, such as hospital mortality rates or the extent to which appropriate care is provided. Based on the expectation that provision of such information helps mitigate asymmetry in information and achieve efficient quality outcomes, information disclosure in general is desirable. (1) Currently, disclosure programs are expanding to varied health care settings, including health insurance markets. In most markets, the main function of insurance is to protect consumers from financial risks. However, in health insurance markets, it is common that health plans provide health care services to consumers as well as insurance, and quality of health services provided by a health plan is an important feature of the plan. Disclosure of quality information in health plan markets is intended to help consumers identify the quality differences among individual health plans and make an informed choice of a plan. While information disclosure is promoted in several settings in health care markets, there has been little discussion of whether disclosure should be mandated or voluntary. Mandatory disclosure programs were started in hospital markets in the late 1980s by the Health Care Financing Administration (currently the Centers for Medicare and Medicaid Services [CMS]). Most disclosure programs implemented by regulatory bodies have been mandatory, but a few remain voluntary. (2) Economic theory predicts that mandatory disclosure of quality information is not necessary because market mechanisms will lead all providers except the poorest quality to voluntarily disclose if disclosure costs are negligible (Grossman, 1981; Milgrom, 1981). The main idea of this theory is that if consumers are rational and they treat undisclosed information as the worst, markets will "unravel" because providers are better off by disclosing than by remaining silent. It has also been argued that mandatory disclosure rules are not necessarily welfare improving, suggesting that government's role be confined to creating environments that facilitate voluntary disclosure (Easterbrook and Fishcel, 1984; Fishman and Hagerty, 2003). However, empirical studies that examined whether unraveling took place in markets as diverse as salad dressings and health plans reported that unraveling was not complete in either market (Mathios, 2000; Jin, 2005). Since the welfare effects of mandatory rules are not always positive and evidence suggests that market unraveling is incomplete, any study that provides information to help guide the development of policy about disclosure is desirable. This study examines incentives for disclosure of quality information by health maintenance organizations (HMOs) using a unique data set available from a voluntary disclosure program. …