Markets, Part II: Informational symmetry

Okay, it's part two of my series on why markets work well for widgets but not as well for health care.

Recall that in the first post, I used widgets to show how markets can be self-correcting and result in benefits for everyone involved, without the need for government interference. I then identified five qualities of a market that make it work well. I'm about to look at those qualities in a little more detail, to see whether they are qualities that a market for healthcare possesses.

Where I'm not going with all this
Before I address the first quality (informational symmetry,) let me head off a concern that's been raised about where I'm going with all this. Even if I persuade you that markets aren't good at allocating healthcare resources, this will not commit me (or you) to the position that the government must 'run' healthcare. My primary goal, in fact, is much less ambitious: it's simply to expose as naive the commonly-heard claim that 'the way to reform healthcare is to expose it to true competition!' As I'll try to show, market competition can only work for certain limited aspects of healthcare. (What it means for healthcare to 'work' will, I suspect be a bone of contention, but let's leave that alone for now.)

Informational Symmetry (or equality)
(I should've used 'symmetry' instead of 'equality' becaue 'equality' has all sorts of connotations that aren't warranted in this context.)

If I'm in the market for widgets, I can compare the quality of widget brands with reasonable confidence that (1) I'm asking the right questions (how well will this widget work in my wangle?) and (2) the information I'm getting is accurate (because widgets are not too difficult to understand.)

I've fallen and I can't get up!
Now let's say I've sprained my ankle pretty badly. X-rays show it's not broken, and the ER docs said "ice it, elevate it, wrap it, here are some crutches and some pain meds--you should follow up with your PCP." Fine so far--let's stipulate that this is good ER care.

But now it's a day later and I'm in the market for proper followup care for my sprained ankle. The first thing to observe is that I don't even know what proper care for my sprained ankle is. Frankly, I'm not even sure exactly what it means to have a sprain.

I see my PCP. He tells me the same things the ER docs told me--ice it, rest it, wrap it, etc. Now, how should I feel about this care? Should I say, as many patients do, "I coulda looked that up on WebMD! What a ripoff!"? Should I say "thanks for the confirmation and the followup"? Should I ask for an MRI? Should I ask for a consultation with an orthopedist?

Dammit, Jim: I'm a neurologist, not an orthopedist!
I don't have any way to know what optimal care is, even for something as simple as a sprained ankle! Mostly this is because I don't know the variety of ways an ankle can be sprained. I don't know the five hundred medical conditions that can predispose someone to sprain their ankle. I don't know what an MRI can and can't show about an ankle. I don't know what the treatment alternatives are, I don't know when to start walking on a sprained ankle.

This is the primary source of informational asymmetry in healthcare--the asymmetry of medical knowledge between the doctor and the layperson. The expert possesses a lot of information that I don't. He cannot possibly impart to me all of the relevant knowledge that goes into making the best decision. At some point, I just have to trust that the doctor is giving me good care.

NB: It's precisely for this reason that professions exposed to large amounts of informational asymmetry (medicine, the law, engineering, etc.) are associated with a professional ethic known as fiduciary duty. The professional has a duty to act strictly in the interests of her patient/client. This duty is enforced mostly by the professionals themselves, but to some extent also by policy/regulation/law.

"Patients don't have any incentive to limit costs, because insurance insulates them from the impact of their decisions."
I've heard this argument, in one form or another, a lot lately--it's sometimes couched in terms of 'moral hazard'. If insurance is picking up the bill, why shouldn't I seek out the highest (perceived) quality care I can, and damn the cost? The argument isn't usually accompanied by empirical evidence--or even analysis--that shows this to be a big driver of cost.

The solution, usually implied, is to have patients share more of the cost of care, which would incentivize them to 'shop around'. Works for widgets, right? Just one of the many problems with this as a large-scale solution is the informational asymmetry. How the hell do I 'shop around' for low-cost-high-quality healthcare, when I don't even know what the hell healthcare I need? This should be absurd on its face. There's a potential solution, though--make the ones with the information (as much as can be had, anyway) make the decisions about cost...

"Doctors don't have any incentive to limit costs (at least when they're paid fee-for-service,) because they get paid without regard to cost."
This argument usually accompanies the previous argument, with the implied solution being that doctors should have direct personal financial incentives to reduce cost. This solution exists currently, in the form of 'capitated' payment plans (the doctor gets $X to care for Y patients for Z months and keeps whatever's left, or bonuses for coming in under-budget.) This would seem to put the cost-management function in the hands of the doctors, who do have the relevant information.

This solution is misguided, though not on grounds of informational asymmetry. It's misguided because it puts physicians under direct, personal pressure to make decisions about each individual patient on the basis of cost. This is the most certain way to erode the physician's sense of fiduciary responsibility to her patient--and is thus a very bad idea.

What's the Solution?
How, then, should we make decisions about cost-effectiveness in the face of informational asymmetry? If patients can't make them (they can't evaluate effectiveness,) and doctors can't make them (we don't want them to consider costs too much when faced with an individual patient,) we're screwed, right? Wrong--we could, if we wished, pool our resources together to insure each other against healthcare risk. We could then ask all the relevant experts to come together and make some assessment of cost-effectiveness. We would, of course, insist that this assessment be transparent and open to debate and revision...

Hmmm. Isn't a version of this the way it works now? We insure each other against health risks. The insurers make cost effectiveness judgments that apply to the risk pool. They cover the more cost-effective things, and don't cover the less cost-effective things.

It's true--the insurers do something like this in an effort to control costs. They compete with each other, and whoever can do it best is more likely to get the business of employers, who buy almost all the healthcare insurance in this country. There are potential hazards inherent in this system (lack of transparency, barriers to entry, switching costs, etc.,) but those are topics for later posts.

For now, it's sufficient if I've persuaded you that informational asymmetry is one reason to reject simplistic calls for 'more market competition' in healthcare.

In the next post I'll tackle barriers to entry. I promise, it'll be much shorter, because it's less of a problem for healthcare markets...