The Value of Rating Systems in Healthcare Credence Goods Markets

In this paper, we experimentally investigate the effect of reputation and feedback on market outcomes in healthcare markets. Healthcare markets are characterized by asymmetric information between physicians and patients. Physicians have an information advantage over patients with respect to the appropriate treatment. They may exploit this advantage by providing either too little (undertreatment), too much (overtreatment), or may simply charge for services not rendered (overcharging). We investigate the effect of a feedback mechanism, in form of a five-star rating system, in two different market environments: a market with direct reputation and a market without direct reputation, i.e. a market that mimics a situation where patients and physicians have no prior experience with one another. We find that the effectiveness of the feedback mechanism heavily depends on market structures. Allowing patients to rate interactions with physicians in markets without direct reputation results in less physician misbehavior and improved market outcomes. However, in markets where patients are experienced and physicians can build a direct reputation, the implementation of a feedback mechanism does not enhance market outcomes, as these markets already operate at high levels of efficiency. Taken together, our results suggest that feedback mechanisms are most effective when patients have no experience with physicians but provide no additional benefits if patients have, and draw on personal experience.