Review of the Last Lecture

Review of the Last Lecture • Finished our discussion of the second source of market failure in the HC market: externalities • Today begin our discussion of the third source of market failure in the HC market: information asymmetry

3rd Source of Market Failure in the HC Sector: Information Asymmetry • What is information asymmetry? • why is it relevant? • why does it lead to market failure? • How has society tried to deal with it? • Can the problem be resolved this way? • Consequences of the policies that deal with info asymmetry ///

What is Information Asymmetry in the HC Market? • Information Asymmetry  HC provider is more knowledgeable about HC than the patient • there are two aspect to this information asymmetry: • HC provider knows more about producing HC goods and services than the patient  supplier of skills • HC provider knows more about what HC will do for HS  agency role.///

HC Provider: Supplier of Skills • HC professional is a supplier of skills: true for many non-HC goods, e.g. auto mechanics • this type of information asymmetry need not lead to market failure • we may not have the technical skills, but we do know the Marginal Benefit (MB) of the good/service produced • for example: most of us don’t know how to fix an automatic transmission but we do know what the MB will be to us if spend $1,200 having the transmission in our car repaired. • We rely on the mechanic’s advice on what work needs to be done and how much it will cost, but we generally do not need the mechanic to describe how the repair will affect the functioning of the car we can assess MB of the repairautonomous demand. ///

HC Provider: As Agent • Information asymmetry not limited to differences in technical skills as in mechanic-client relationship • HC Provider also advises on the HC  HS relationship • patient is generally unable to assess what the MB of the suggested HC will be, relies on the physician for this info; this is very different from the mechanic-client relationship • IMPLICATION  since the patient cannot assess the MB of proposed HC independent of the HC provider’s input, the demand curve is notautonomous, i.e., it cannot be defined independent of supply side conditions • patient knows MB of HS but not of HC!///

Information Asymmetry and Endogenous Demand for HC • can’t purchase HS  if we could  demand autonomous (i.e., exogenous) since consumers can independently decide on the MB of HS (don’t need input of physicians) • can only purchase HC (not HS), need providers to tell us HC  HS so we can determine MB of HC; thus, HC providers control the position of the demand curve • Question is  whose preferences are being expressed by the demand curve: patient’s or provider’s? • would the fully informed patient choose the same care as selected on her/his behalf by the provider?///

Consumer Ignorance: Necessary, not Sufficient, for Endogenous Demand • if the consumer believed the HC provider to be as ignorant of the HC HS relationship, consumer would not rely on the HC provider for advice on this relationship. • it is the information asymmetry that results in endogenous demand, not solely consumer ignorance.///

Endogenous Demand and Market Failure • if HC providers influence the consumers perception of the MB of HC  control the position of the demand curve  market failure may, but need not, result (see perfect agent discussion below) • Market could fail in two key ways: • HC sector is smaller/larger than it would be if fully informed consumers made the HC choices • Within the HC sector some HC goods/services are over supplied relative to other HC goods/services • Consequence  sub-optimal bundle of goods and services produced  not maximizing utility with available resources.///

Extreme Consequence of Info Asymm No HC Market • info asymm  buyers can’t tell quality of the HC good/service but seller can • seller of high quality care  will want a high price • buyer will only want to pay a price based on average quality since s/he can’t discern quality of care  assumes all are average quality • high quality units withdrawn from the market since no one willing to pay the price  this lowers average quality • as average quality   patients willingness-to-pay  second highest quality units withdrawn etc.  market could disappear! ///

Info Asymm Lemons Principle • Info asymm need not destroy market completely • presence of low quality goods/services (lemons) depresses perception of average quality high quality items simply not offered • bad units drive out good units (e.g. second hand car market!)

Policy Response to Information Asymmetry in the HC Market • Information asymmetry introduces a conflict of interest for the HC provider  self interest (income) •  patient’s interest • Policy response to info asymmetry certification by professional associations  assures quality and provides assurance higher price reflects higher quality. • Also avoid exploitation (professional ethics/discipline) /// • by definition  supplier-informed demand is the goal of the agency role

Consequence of Certification HC Providers • Certification (credentialing) of HC providers confers control over entry into the profession and over the behavior of the profession’s members. • Certification creates scope for exercising monopoly power by the professional organization that controls certification (restrict entry and limit competition among members) • Thus, certification to address market failure from information asymmetry may introduce another source of market failure => monopoly power

HC Provider as Perfect Agent • Information Asymmetry not a problem if provider is a perfect agent • Perfect agent  chooses for the patient what the patient would have chosen for him or herself if the patient had had the same medical knowledge as the provider  demand curve is where it should be • however, unlikely HC provider is a perfect agent • in real world  agency relationship is incomplete • Demand curve can be shifted by HC provider advice; i.e. demand is endogenous  normative and positive implications to be discussed later///

Review of the Last Lecture