Asymmetric Information and Pooling Contracts in the Hospital Sector

Many regulators in health-care systems use pooling contracts such that payments do not depend on severity. This policy is motivated by concerns about moral hazard. In this paper, we show that this policy may be optimal because of nonresponsiveness when patients' severity is private information. We show in which cases the hospital may be nonresponsive to the regulator's objective under asymmetric information. We identify the necessary conditions under which pooling contracts are optimal, and we characterize the optimal fixed price and the optimal quantity of health services according to the value of the fixed costs.