Optimal Quality Reporting in Markets for Health Plans

Quality reports about health plans and providers are becoming more prevalent in health care markets. This paper casts the decision about what information to report to consumers about health plans as a policy decision. In a market with adverse selection, complete information about quality leads to inefficient outcomes. In a Rothschild-Stiglitz model, we show that averaging quality information into a summary report can enforce pooling in health insurance, and by choice of the right weights in the averaged report, a payer or regulator can induce first-best quality choices. The optimal quality report is as powerful as optimal risk adjustment in correcting adverse selection inefficiencies. (March 2006)