Health Economics- Lecture Ch10

8/3/2019 Health Economics- Lecture Ch10

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Asymmetric Information

Dr. Katherine Sauer

Metropolitan State College of Denver

Health Economics


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Overview:

I. Asymmetric Information

II. Health Insurance and the Lemons Principle

III. The Agency Relationship

IV. Consumer Information, Prices, and Quality


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I. Asymmetric Information

A. Extent of Information Problems in the Health Sector

Certainly information gaps and asymmetries exist in thehealth sector.

They are perhaps more serious for health care than for

other goods that are important in household budgets.


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Information gaps do not necessarily preclude thepossibility of having a high degree of competition.

In particular, mechanisms to deal with information

gaps should not be overlooked.

These mechanisms include licensure, certification,

accreditation, threat of malpractice suits, the physician-

patient relationship, ethical constraints, and the

presence of informed consumers.


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B. The Lemons Principle

Nobel Laureate George Akerlof (1970) is often credited

with introducing the idea of asymmetric information

through an analysis of the used-car market.

First, it tells us much about adverse selection and the

potential unraveling of health insurance markets.

Second, Akerlofs example leads right into the issue ofagency.


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When potential buyers know only the average quality of

used cars, then market prices will tend to be lower than thetrue value of the top-quality cars.

Owners of the top-quality cars will tend to withhold their

cars from sale.

In a sense, the good cars are driven out of the market by

the lemons.

Under what has become known as the Lemons Principle,

the bad drives out the good until no market is left.


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II. Health Insurance and the Lemons Principle

Adverse selection applies to markets involving health

insurance and to analyses of the relative merits of

alternative health care provider arrangements.

Information asymmetry will likely occur because thepotential insureds know more about their expected

health expenditures in the coming period than does the

insurance company.

In this market, the higher health risks tend to drive out

the lower health risk people, and a functioning market

may even fail to appear at all for some otherwise-

insurable health care risks.


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A. Inefficiencies of Adverse Selection

If the lower risks are grouped with higher risks and allpay the same premium, the lower risks face an

unfavorable rate and will tend to underinsure.

They sustain a welfare loss by not being able to purchaseinsurance at rates appropriate to their risk.

Conversely, the higher risks will face a favorable

premium and therefore overinsure (insure against risksthat they would not otherwise insure against).

This, too, is inefficient.


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B. Evidence of Adverse Selection

Evidence of adverse selection has been found in

markets for supplemental Medicare insurance (Wolfe

and Goddeeris, 1991) and individual (nongroup)

insurance (Browne and Doerpinghaus, 1993).

In more recent work with a sample of single, employed

persons, Cardon and Hendel (2001) found that those

who were insured spent about 50 percent more onhealth care than the uninsured.


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C. Experience Rating and Adverse Selection

Group insurance can be a more useful mechanism to

reduce adverse selection.

Group plans enable insurers to implement experiencerating, a practice where premiums are based on the past

experience of the group, or other risk-rating systems to

project expenditures.

Because employees usually have limited choices both

within and among plans, they cannot fully capitalize on

their information advantage.


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III. The Agency Relationship

An agency relationship is formed whenever aprincipal

delegates decision making authority to another party, the

agent.

In the physician-patient relationship, the patient

(principal) delegates authority to the physician (agent),

who in many cases also will be the provider of the

recommended services.


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The perfect agent physician is one who chooses as the

patients themselves would choose if only the patients

possessed the information that the physician does.

The problem for the principal is to determine and ensurethat the agent is acting in the principals best interests.

Unfortunately, the interests may diverge, and it may be

difficult to introduce arrangements or contracts thateliminate conflicts of interest.


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IV. Consumer information, prices and quality

A. Consumer Information and Prices

Satterthwaite (1979) and Pauly and Satterthwaite (1981)

introduced one of the most novel approaches to handle

issues involving consumer information and competition.

-identify primary medical care as a reputation

gooda good for which consumers rely on the

information provided by friends, neighbors, andothers to select from the various services available

in the market


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Physicians are not identical and do not offer identical

services.

Because of this product differentiation, the market can be

characterized as monopolistically competitive.

Under these conditions, the authors show that an increase

in the number of providers can increase prices.

The economic idea is that reduced information tends togive each firm some additional monopoly power.


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B. The Role of Informed Buyers

The degree to which imperfect price information

contributes to monopoly power should not be

overemphasized.

A growing body of literature shows that it is sufficient

to have enough buyers who are sensitive to price

differentials to exert discipline over the marketplace.


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C. Price Dispersion

Juba (1979) found that the variations in physician fees

appear to be larger than those found in other relatively

competitive markets.

It is not clear, though, that variations in effective

transactions pricing resulting from insurance agreements

lie outside of competitive norms.


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D. Consumer Information and Quality

Consider the consumers direct role: that the physicianpatient relationship enables patients to monitor providers

and encourages physicians to make appropriate referrals.

To the extent that many specialists rely on referredpatients, these specialists would seem to have incentives

to maintain quality.

Are they also rewarded with higher prices for higher-quality services?


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Haas-Wilson study:

The evidence shows that patients rely on informed

sources (agents) for information and that higher quality,as measured by informed referrals, is rewarded by higher

fees.


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E. Other Quality Indicators

The National Committee for Quality Assurance(NCQA), a private accreditation body for HMOs,

issues report cards based on about 50 standardized

measures of a plans performance (e.g. childhood

immunization rates, breast cancer screenings).

A key assumption behind efforts like this is that

information about quality will, like price information,help discipline providers through patient choices.


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Evidence:

Initial evidence on the intended effects of planperformance ratings brings the report card strategy

into question.

Tumlinson et al. (1997) found that independent planratings are relatively unimportant to consumer

choices.

Chernew and Scanlon (1998) confirm thatemployees do not appear to respond strongly to plan

performance measures, even when the labeling and

dissemination were intended to facilitate their use.


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Scanlon et al (2002) examined a flexible benefits

system introduced by General Motors in 1996 and 1997and found that plans with many above-average ratings

were not much more successful in attracting enrollees

relative to plans with many average ratings.

Together with other results on plan switching

(Beaulieu, 2002), we can conclude that the provision of

quality information does influence consumers,

particularly when the quality ratings are negative.


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Final Thoughts:

There is little doubt that information gaps, asymmetric

information, and agency problems are prevalent in

providerpatient transactions.

Although there is a potential lack of competition, even

wide information gaps do not necessarily lead to

market failure.


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Discussion Questions:

1. Various commentators have suggested that only 15 to

20 percent of all health care services have been subject

to rigorous, controlled investigation (evidence-based

medicine). If this is true, what are some implications for

efficiency of health care delivery?

2. According to clinical research, nearly half of the care

provided in the US falls short of the recommended

protocols. How do imperfect and asymmetric

information contribute to this phenomenon. How can

health plans or markets be reformed to reduce the quality

gap?

Documents

Health Economics- Lecture Ch10