Perfect Information?
The Huffington Post recently featured a story by Dr. Ricardo Azziz, “The Myth of the Rational Health Care Consumer.”
He disagrees with Uwe Reinhardt’s contention that health care is a “private good.” Azziz writes –
Economists generally categorize goods into two types — public and private. Public goods are defined as “nonrival,” meaning a person can use it without reducing its use by others, and “non-excludable,” meaning individuals cannot be excluded from using the good. Reinhardt gives the example of street lighting.
Private goods are defined as rival and excludable, and private markets are generally assumed to operate under several conditions: First, buyers and sellers are rational; second, perfect information is available; and third, no one player can affect market behavior due to the large number of buyers and sellers involved.
I have seen this sleight of hand before — throwing in the idea of “perfect information” and disqualifying any market that doesn’t have it. Yet I have been unable to find a definition of “private goods” that includes a requirement for perfect information. See –
- http://livingeconomics.org/article.asp?docId=290
- http://www.businessdictionary.com/definition/private-good.html
- http://www.economicshelp.org/blog/2104/economics/private-public-and-free-goods-defined/
- http://tutor2u.net/economics/revision-notes/as-marketfailure-public-private-goods.html
In fact there is no such thing as “perfect information.” No matter what we buy — computers, houses, dog food, laundry soap — the seller knows more about the product than we do. Health care is just like every other market that way.
He goes on –
In a rational model of health care, the consumer must have the ability to distinguish bad products from good, and must have enough information and emotional distance to make purely rational choices about their or their loved ones’ health care.
“Purely rational choices?” I wonder what kind of car Dr. Azziz drives? Emotion has everything to do with choosing a car. We may want a big macho pick up truck with a king cab, or a sexy little red sports car, or a Mercedes to wow the neighbors with how prosperous we are, or Mini Cooper to show the world how humble we are. Advertisers are acutely aware of how much subjective emotion goes into every purchasing decision. Again, health care is not uniquely emotional.
Dr. Azziz adds –
Illness creates an immediate inequality in the consumer equation because it engenders a desperate need to find the “right” solution and to find it now — immediately and without delay.
This is sometimes true, but once again it is also true of many other markets that seem to work reasonably well. Criminal law comes to mind. If I am arrested and hauled off to jail I will have a “desperate need to find the right solution and find it now.” That doesn’t mean I should not be allowed to find my own attorney. In fact, my desperation is all the more reason for choosing my own lawyer, rather than having one imposed on me. There are other times when I may have a “desperate need” that requires instant solutions. I may need to get to Kansas City to see my terminally ill mother before she dies. Should I not be allowed to arrange my own transportation?
Even when people are not sick they make irrational decisions, according to Dr. Azziz. He cites a polemic by the Economic Policy Institute but ignores actual research such as the RAND study on “How Do Consumer-Driven Health Plans Affect Vulnerable Populations?” In fact, the ongoing growth of consumer-directed plans provides strong evidence that consumers are very capable of making good choices in health care — at least when the plans are carefully designed.
But that isn’t really the point of Dr. Azziz’s missive. Instead, he is just pushing the age-old progressive argument that commoners aren’t capable of self-government and need a well-educated elite to guide them. He writes –
The real solution is to introduce greater rationality around the distribution of and access to health care, which will require cogent nationwide health care planning, more rational management of our health care workforce…and an increased supply of providers using clearer and uniform care plans and verifiable delivery metrics.
I suppose the same could be said (and eventually will be said) about every market in America and the world. And who will provide the “greater rationality?” I expect Dr. Azziz and his minions would be more than happy to — for a price, of course.
I fear the government will want to provide the “greater ration-ality”.
How about making an original argument rather than a 50-year old retread! Someone needs to point Dr. Azziz to the Kenneth Arrow’s journal article Uncertainty and the Welfare Economics of Medical Care. He largely restated Kenneth Arrow’s concerns.
Then, Dr. Azziz needs to read the RAND Health Insurance Experiment where enrollees exposed to cost-sharing reduced their consumption by about 30%. Then, maybe read James Robinson article in Health Affairs where joint replacement patients were motivated to seek care at lower-cost hospitals after being exposed to reference pricing.
America is indeed blessed to have the self-anointed like Azziz to guide the benighted like me.
Azziz does not think much of “Consumer Choice”. Perhaps he believes everyday choices should be restricted for most people like me – excepting of course the self-anointed people such as himself. I say that if I and I alone had to power to decide whose choices would be restricted, I might go along with the idea. Azziz wouldn’t like that, because he doesn’t trust me. Well, I don’t trust him.
Good thing the pro choice movement changed its name to pro abortion.
Oh, wait . . .
Wouldn’t that require abolishing the cartel that controls medical education; and allowing a variety of institutions, and a variety of training modalities provide medical care? Or does Azziz assume that means giving the cartel that controls medical education even more regulatory power?
Interesting… Dr. Azziz fears that the private market isn’t suited to efficiently allocate health care resources because we consumers don’t have perfect information and cannot find the “emotional distance” to make sound, rational medical choices.
Yet, the only possible alternative is to endow our democratic government with power to make these decisions for us. This assumes that the people in a position to make these decisions also have perfect information and are adept at creating emotional distance… hmmm…
Does a federal bureaucrat know me, my unique personal preferences and objectives, my willingness to sacrifice benefits between competing options, etc.? If you are going to choose FOR me, you better have perfect information ABOUT me. As far as I know (the NSA notwithstanding), I am the only one with perfect information about ME!
Further, I thought the beauty of democracy was that it was a government OF the people. We elect peers to represent us in making these decisions–peers who are also human, just like you and I, and having less than perfect information AND their own unique emotional attachments to things and people…
Bottom line: If I am unsuited for making emotionally distant decisions with imperfect information about my own health, then how is this problem rectified by shifting this important decision to some bureaucrat who is appointed by some elected official who is supposed to represent MILLIONS of other unique personalities, each seeking MILLIONS of unique goals and objectives?
Out of the frying pan and into the fire… but it does sound like a “jobs program” for bureaucrats…
Sometimes in my speeches to health policy groups I offer to make all their health care decisions for them. After all, I tell them, I used to be an insurance company executive so I am well qualified. I even offer to keep it affordable — I will do this for just $5.00/month. Somehow no one has ever taken me up on the offer
Greg, I will take you up on that offer. My first question, I have a close family member who was diagnosed last week with TN. Remember that my neighbor, a 52 year old anesthesiologist, was committed to a nursing home last year for pain killer usage.
What should we do?
Ron,
You don’t expect me to give you free advice, do you? Oh no, no, no. First, you will have to enter into an exclusive contract with me giving me all power to make all decisions. You might be interested in knowing how I will make those decisions, but I’m sorry, my friend, you would be far too emotional and irrational to handle that knowledge. You will probably also expect a consumer help line or something, but don’t be surprised if you get a busy signal when you call. After all, what do you expect for $5/mo? Any other questions?
Greg, from a marketing point of view it might help enrollments, which apparently you need, if you adopted — the first one is free. Once these people are belly hooked you never know you might be able to double your prices and use electronic funds transfer for payment just like the big boys.
Then never answer your phone.
I know of no safe depository of the ultimate powers of the society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them but to inform their discretion.
— Thomas Jefferson
No one has stated this better in more than 200 years.
As Milton Friedman used to say, not every consumer needs to know what they are doing to have a responsive market.
It only takes 5-10% of consumers to move from one product or provider to create a competitive market. The most informed users will drive change that everyone benefits from.
So, I agree – the idea of perfect information and a perfectly informed consumer is a myth that is not needed to have efficient markets.
Good article that progressives will likely never understand.
Indeed, many competitors work to inhibit the quality of information gathered. I read an article a few years ago about so-called guerilla marketing. One firm – an appliance store – continually lost out on business when its customers compared prices with other stores. A marketing agency devised an ad campaign where the store ran advertisements in the newspaper and offered to give away a free half gallon of ice cream to any customer looking at its freezers. The thing about ice cream; it melts in the summer heat. Once customers got their free ice cream, they had to go home to put it in their freezer. Once customers went home, they were more likely to stay home. Once they stopped comparing prices, more of them came back and purchased a higher-priced freezer.
There are similar examples of firms trying to obfuscate the knowledge consumers have with regards to prices. Universities advertise cheap tuition, only to stick it to students with university fees. Hospitals put up billboards of smiling patients proclaiming the compassion or high quality, but that really tells patients nothing about quality comparisons. Store may raise prices 25% only to advertise them on sale at 20% off. None of that is considered market failure. It’s just non-price competition.
It’s all very frightening, this arrogance of the self appointed elite. The academics are the worst, surrounded by sycophantic students all day, they actually believe they know more than anyone and are rarely wrong.
Somewhere along the way some people have forgotten the benefits and importance of individual freedom.
I grew up in the 1960’s, in the time of Dr Kildare and Dr Marcus Welby. Virtually no one talked about being a consumer of medical care. Medicine was built on the trust of a patient in his/her doctor. The doctor chose appropriate care.
(The recent TV show called House was more kinky, but really had no changes. I watched three full seasons of House, and I never heard one word of dialogue about going against the doctor’s advice to save money.)
In about 1998, the Minneapolis Tribune had a long series in which they recorded every episode in the day of a prominent surgeon. He went from crisis to crisis and money was never mentioned.
So to me, the real underlying question is this: what has caused the emergence of this ‘medical consumer’?
I realize there are many factors. Doctors it seems can no longer defend their patients against price gouging by hospitals (or by other specialists…..some of the ugliest price gouging that I read about is from anesthesiolgists.)
Doctors also cannot control the prices of expensive drugs. (although many doctors make marvelous efforts to get their patients into discount drug programs)
I welcome any other comments on this issue.
Healthcare consumerism is not about challenging your doctor’s decisions. It’s about having choices clearly discussed and identified both before and after your need to have medical care.
Example: My sister had breast cancer and a mastectomy. Follow up could include expensive radiation and/or chemo. But what is the risk of “treatment damage” versus improved 5-10 year mortality? A new genetic test based on the specific cancer cells in that patient allowed my sister to make that decision as an informed patient along with her doctor. … She declined rad/chemo because it didn’t improve 5-10 mortality enough. She has been cancer free for 10 years.
Healthcare consumerism isn’t about saving money, it’s about saving lives … but that in fact does save money.
I have never understood the argument that saving lives does in fact save money. They use this argument against smokers. But I know if a smoker dies at 64 years of age, on his own dime, that is much cheaper than 35 years of Medicare expenses way off in the distant future if he lives.
They say the same about exercise too. I know that people who are totally uninformed about exercise do all sorts of dangerous stuff. I know how much a knee replacement will cost. It would be much cheaper to let them die of a heart attack. Of course a Life Insurance agent would argue with me.
Also, I just got off the phone with a nurse who is 62 years old and he told me he was very suspicious of doctors every time they open their mouths. I told him that thank goodness for the Docs who saved my son’s life last March. But, the doc who tried to pad my father’s bill with all sorts of things that never happened was curious why my Dad called him out on it. The doc said, “Why do you care?
Look what’s happened to LASIK surgery as it became competitive on an open cash Market with knowledgeable consumers – the price dropped and availability increased. Consumers have made rational decisions based on information regarding price, quality and outcome.
“Consumers have made rational decisions based on information regarding price, quality and outcome.”
Correct, Joe.
I would add that the LASIK example also suggests that providers, in this case, LASIK surgeons, sre able to price their services rationally according to what the market obliges. The LASIK providers do not need government regulators to “help” them rationally price their services because the market gives them the info they need. In other words, functioning markets provide useful information to all participants and useful information is the basis for rational decisions all around.
LASIK is a relatively simple procedure that can be scheduled in advance. There probably isn’t much variance in the time it takes to do it. Setting a rational price in advance is not difficult.
Some drugs are extremely expensive. However, at least the price of the drug can be determined in advance and the member can see what tier it’s in and determine his out-of-pocket cost or, if he doesn’t have drug coverage, he can call the pharmacy and get a price and even comparison shop among several pharmacies in his area.
Hospitals, for their part, can’t even give the patient a binding estimate of out-of-pocket costs for a simple procedure like a colonoscopy because maybe there will be a polyp that needs to be biopsied and maybe there won’t be or maybe there will be complications. In theory, they could set a bundled price for a colonoscopy whether there is a polyp or not but our fee for service payment model has a separate billing code for a pathologist to determine whether or not the polyp is cancerous. It’s aggravating to put it mildly.
Way too much care must be delivered under emergency conditions and cannot be scheduled in advance including sometimes even quite basic care delivered in an emergency room. This is where patients are most vulnerable to unpleasant billing surprises especially if they are uninsured or the provider is out-of-network. We need special rules that restrict how much can be charged core care that has to be delivered under these circumstances.
Lasik is generally paid out of pocket, whereas intraocular lens (IOLs) to remove cataracts are generally paid for my Medicare and private insurance.
The market for Lasik is very competitive. The quality is better and the price lower ($2,223 per eye) than when doctors began performing it in volume about 15 years ago. There are even Lasik deals on Groupon where surgeons are offering both eyes for $2,500.
Procedures for IOLs, by contrast, tend to be more bureaucratic. Doctors tend to charge about $3,500 — or about $4,500 far more if you want a special lens. However, AllAboutVision.com found that about one-quarter of people paid more than $5,000 for cataract surgery with the special lens. Nearly two-thirds paid more than $4,000 (per eye). It’s been my experience that IOLs have wider variation in price and many doctors aren’t really geared to compete for patients who are not cookie cutter Medicare patients. I believe that’s because Medicare is the biggest payer (rather than the patient) and physician practices are tailored for the Medicare market.
What about “The Myth of The Rational Huffington Post Article”?
Devon’s last paragraph puzzles me.
I do not know the Medicare fee schedule for cataract surgery. However I bet that Medicare pays a lot less than $4000 per eye.
I do not think that a doctor can collect an amount from a senior that is far in excess of Medicare’s allowable fee. Clinics at least used to declare that they abided by ‘mandatory assignment’ with no balance billing.
So who is paying the $4000 per eye?
That is supposedly the “cash” price. But my experience is that surgeons who do cataracts do not compete on price because they have so few cash-paying customers. Surgeons who perform LASIK do compete on price because so many of their customers are paying with cash. My fiancé is looking for this surgery, not because of a cataract, but a problem that can be solved with the same procedure (i.e. a new lens). The last guy she went to wanted nearly $10,000 including a multifocul lens.