Does the Market Reward Quality?: Evidence from India

There are two salient facts about health care in low and middle-income countries; 1) the private sector plays an important role and 2) the care provided is often of poor quality. Despite these facts we know little about what drives quality of care in the private sector and why patients continue to seek care from poor quality providers. We use two field studies in India that provide unique insight into this issue. First, we use standardized patients to show that private providers do not have a financial incentive to provide good technical quality (correct treatment and correct diagnosis) because they are not rewarded by the market for doing so. Instead providers are rewarded by the market for elements of quality that the patient can observe (good patient interactions and more effort), which are less important for health outcomes. Second, we use a discrete choice experiment to show that patients are willing to pay higher prices for better technical quality. Taken together, this research highlights a market inefficiency and suggests that engaging patients with accessible information on technical quality of the providers in their community could shift demand to providers that provide better care.