Picture of Anthony M DiGiorgio, DO, MHA, FAANS

Anthony M DiGiorgio, DO, MHA, FAANS

Economic Concepts in Neurosurgery Information Asymmetry

As doctors, we know much more about disease pathology than our patients.  We know the risks & benefits of various treatments and tests.  The patient is seeking our expertise, after all.  This information asymmetry is one argument used against treating healthcare like a normal economic good.

Yet, information asymmetry is not unique to healthcare.  All markets have information asymmetry and normal transactions still occur.  This does lead many to view transactions as one-sided, as if they are perpetually being “ripped off” or “screwed.”  As Devon Eriksen puts it, “since sellers are more often in the business of selling than buyers are in the business of buying, it is somewhat more common for buyers to end up overpaying, usually with rarely-purchased goods and services.”  When shopping for any specialized professional service, such as a contractor or lawyer, there is the same massive gap in information that exists in healthcare. 

The wonderful thing about markets is that there are various mechanisms which arise to mitigate the effects of this asymmetry.  Prior to the internet, one had to rely on reputation to ensure a good deal.  However, the internet has massively increased the market knowledge of buyers.  If a lawyer or contractor continuously rips off his clients, the internet will make sure that reputation is known.  Look what cars.com has done for used car sales.  It’s much harder for a sleazy slick-talking salesman to foist a car on someone who can quickly look up what that model goes for online and if it has a reputation of being unreliable. 

Even in emergencies, where thorough research may not be possible, fair transactions can occur.  A burst pipe in a home needs a quick solution and the information asymmetry is massive.  Yet that transaction occurs voluntarily, without much government intervention.  If the damage requires six-figures of home repair, enlisting home insurance again has massive information asymmetry, yet it routinely gets done.  So even in an emergency, asymmetric information doesn’t preclude a normal economic transaction.  

Information asymmetry occurs in both directions as well, such as when individuals purchase health insurance.  The purchaser knows more about his or her own health than the insurance company, knowing the low risk of foregoing insurance.  This historically meant healthy people didn’t purchase insurance, an adverse selection that the Affordable Care Act tried to remedy by instituting the individual mandate.  Although insurance companies can no longer charge more for patients with pre-existing conditions, they combat this adverse selection with wide arrays of products.  This practice, referred to by economists as screening, allows purchasers with asymmetric information to sort themselves.  For example, an individual who might use more insurance would purchase a low-deductible comprehensive plan while a healthier person might take the high-deductible health-savings account plan. 

Every one of us, as consumers, takes asymmetric information into account with our daily transactions.  When purchasing something off Amazon, we don’t know if the product is anything close to the description and photographs.  The seller has all the information.  We have a description, some star ratings, and Amazon’s return policy of offset the asymmetry.  Reputation goes a long way into mitigating asymmetric information.  Even so, we still occasionally feel duped. 

Lopsided transactions will always happen.  Markets aren’t perfect.  We have all purchased an item that we considered a rip-off.  Many, but fewer, have felt scammed by a contractor or other professional service.  Even though the market’s allocation of resources is not ideal due to this problem, the alternative is some sort of governmental regulation, typically in the form of sweeping price and wage controls.  The problem is that the government has information asymmetry as well.  When Medicare sets the price of an office visit, that’s the government assuming it knows more than the market for the price of a visit and instituting price controls.  The market, however, can use the aforementioned techniques to cancel out some of the adverse outcomes of asymmetric information because, in the end, buyers and sellers wish to transact. 

We can acknowledge information asymmetry and treat healthcare as a normal economic good.  The alternative, sweeping government regulation of the transaction, only distorts the market and takes the decision out of the hands of the patient and the physician.  We don’t do this for used cars, lawyers, or contractors, which begs the question of why we allow it in healthcare.