Thursday, April 28, 2011

Information over-load and health care

Standard explanations trace market failures in health care in general and health insurance in particular to information asymmetry (patients knowing more about their condition than the insurers and doctors knowing more about treatments and diagnostic procedures than patients) and its resultant adverse selection problems, and moral hazard (insured patients having no incentive to curb treatment and costs) concerns. Here are two less-discussed dimensions to this debate, both of which highlight the complexity involved in managing health care markets.

First, Tyler Cowen makes an important distinction between information asymmetry and information overload, and feels that adverse selection is less a problem. He writes,

"When it comes to the elderly, adverse selection as a problem is overstated. The real problem is usually a high degree of information about many conditions, so often insurance is difficult per se. It’s not the asymmetry of information that is the core issue, it is the existence of lots of information, and that is one of Arrow’s subtler points. That distinction matters a good deal for mechanism design.

An old person might know better his health care condition, but not know better his expected health care costs. That is a critical distinction. You can’t reach age 60 and credibly say: "I’ve been healthy so far, I guess my lifetime health care costs will be low." It’s not even clear whether the healthy or the unhealthy will have lower health care costs in their later years; the unhealthy might die rather quickly and decisively. Adverse selection on the grounds of health care costs need not be high and arguably actuaries can estimate those as well as the individual himself."


Another manifestation of information over-load involves the problem of patients being unable to effectively discriminate between multiple treatment options. For example, a patient exposed to two different sets of diagnosis, struggles to make a choice, leave alone the correct choice. Also, though the patient can avoid subjecting his/her body to all diagnostic tests if he/she can trust the doctor's clinical skills, such trust, for various reasons, is an increasingly rare commodity.

Further, most often, in their anxiety, patients end up following the herd and over-treating themselves. Unfortunately, the incentives of the doctors and the diagnostic service providers too are aligned towards leading patients down the path of the herd. In all these cases, it is not information asymmetry, but information over-load that either paralyses decision making or leads patients to make the wrong choices.

Co-payments and deductibles, while trying to incentivize patients to optimize on their treatment, does not always, atleast among those at the top half of the income ladder, curb over-treatment. Awareness campaigns and focussed information dissemination about medical conditions and treatment options can play an important role in helping patients make informed treatment choices.

In another post, Paul Krugman makes the point that health care recipients cannot be exact substitutes for "consumers" in the general marketplace. He writes,

"Medical care is an area in which crucial decisions — life and death decisions — must be made; yet making those decisions intelligently requires a vast amount of specialized knowledge; and often those decisions must also be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping.

That’s why we have medical ethics. That’s why doctors have traditionally both been viewed as something special and been expected to behave according to higher standards than the average professional. There’s a reason we have TV series about heroic doctors, while we don’t have TV series about heroic middle managers or heroic economists."


The term consumer-choice becomes meaningless in case of patients fighting to save their lives. The choice is mostly a fait accompli. As Krugman argues, it is indeed surprising that even forty years after Ken Arrow wrote this seminal paper distinguishing health care from other markets, the issue still evokes confused rhetoric. See also this post on the shockingly low levels of health care literacy even in the US.

No comments: