Asymmetric Information Problem Solved

In a classic article, Stanford University professor Kenneth Arrow argued that the market for medical care is inherently flawed because of asymmetric information. In what follows, I am going to embellish on the argument, making it even more forceful than it was in the original text.

The doctor knows more than the patient. As a result, doctors can recommend unnecessary care that enhances their incomes, even though it may be of no benefit to the patients. Doctors might also recommend one drug over another or one medical device over another because of their financial relations with the producers. Because of their limited knowledge, patients have no reliable way of evaluating the quality of the advice they are getting ― especially when they get different advice from different doctors.

About the only check on the system is third-party payer utilization review. But this is crude and highly imperfect activity engaged in by another party that has a financial interest in the outcome.

Arrow said this flaw in the market justifies occupational licensing and other government restrictions on doctor behavior. Health economics textbooks have generally accepted Arrow’s critique, holding that the free market for medical care has no answer to the problem.

Until now.

2nd.MD is a Houston-based company that has come up with an ingenious solution. The company arranges virtual consultations with some of the top doctors in the country so that patients can get a second opinion. The doctors represent 250 subspecialties and they are at places like Harvard Medical School, the Cleveland Clinic, Mayo Clinic, etc. Since the doctor who gives the second opinion has no financial interest in the patient’s subsequent care, the only motive behind the advice is the welfare of the patient.

The system works like this. Employers sign up with 2nd.MD and make its services available to the employees for free. If an employee questions whether a recommended procedure (surgery or an MRI scan, for example) is really needed, the employee can contact 2nd.MD’s Care Team and they direct the patient to an appropriate group of specialists. The patient can go on line and read about the specialists, check out their credentials, choose one (there are usually two or three choices) and let 2nd.MD arrange for the consultation.

The Care Team helps obtain the patient’s medical records and makes them available to the specialist in advance. The consultation can be by phone or by video.

Why are some of the top-rated doctors in the nation willing to give “second opinions”? One reason is that the remuneration is attractive. They receive from $100 to $400 for a consultation that usually lasts about 20 minutes. Another reason is the ease of performing the service. They can do it from their home or office and they can choose the hours when they consult. Also, there is very little fear of a malpractice problem. But if the specialist is worried that a malpractice claim might emerge, she can choose to pay $3 and get immediate insurance covering the consultation before it takes place.

Here are some obvious questions:

  • How are the specialists able to get around state laws that require doctors be licensed to practice in the state where the patient receives the care? Answer: these doctors are not actually “practicing medicine”; they are just giving advice.
  • Why is the malpractice premium so low and why does this insurance not fall under state regulation of malpractice insurance? Answer: again, these consultations are not considered “practicing medicine”; so the insurance is not technically “malpractice insurance.”
  • Do the employers urge or require the employees to use the service prior to expensive care? Answer: so far, the consultations are completely initiated by the employees; but in the future “nudging” is a possibility.
  • If employers are picking up the tab, they must think medical costs will be lowered. But how do we know that the specialist won’t recommend procedures that are even more expensive than the original doctor? Answer: Academic doctors and staff doctors are naturally more conservative than fee-for-service physicians.

2nd.MD is currently covering about 30,000 employees and that number could double or even triple in the next few months. Clint Phillips, the entrepreneur behind the venture estimates that:

  • Every 100 consultations results in the avoidance of 11 surgeries, 12 optical scans and 12 further physician visits.
  • Overall, he says the average specialist consultation saves about $1,986 in direct medical costs.
  • Among the most impressive results, these consultations have avoided an unnecessary liver transplant, saved a patient’s eyesight, saved a patient’s hearing and saved two patient lives (because they were being mistreated for cancer).

Comments (53)

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  1. Chaz says:

    Sounds like death panels to me.

  2. Excellent article! Thank you.

  3. JD says:

    Those are some impressive accomplishments. This could end up dramatically decreasing the cost of health care while still improving quality. Who knew that the free market was the answer all along?

  4. Dewaine says:

    It sounds good, although, it doesn’t sound like it completely insulates the customer from corruption (nothing ever does). Doctors can still prescribe drugs or procedures that they may profit from (kickbacks of some sort).

    I guess the most important feature is that it is a second opinion. Getting significantly conflicting views between doctors should signal the patient to be cautious and ultimately get it right.

  5. JD says:

    I agree with you, although, 2nd MD also has a great incentive to only employ honest doctors. In such a public domain, there would be a great risk of losing credibility for a doctor not performing earnestly.

    • JD says:

      @ Dewaine

    • diogenes says:

      The doctors on 2nd MD are semi anonymous. Without the discipline of peer pressure and malpractice they have no incentive to be honest.

      • Al says:

        diogenes: What is their incentive for being dishonest if they are acting as agents of the patient and are paid a fixed price?

        • Chaz says:

          I thought the employers pay for the second opinion. There most certainly is an incentive for the doctors to suck up to the employer for more work.

  6. Don McCanne says:

    2nd.MD is selling a service to employers that will reduce their health benefit costs by providing a panel of physicians who are financially motivated to “give advice” that a recommended diagnostic or treatment program not be followed. If instead they have a pattern of giving advice that would result in additional spending, then why would 2nd.MD leave those physicians on their panel?

    Most second opinions are offered for the medical benefit of the patient. These second opinions are offered for the financial benefit of the employer.

    This hasn’t removed conflict of interest. It merely inserts another entrepreneur (2nd.MD) into the health spending equation – more administrative waste.

    • JD says:

      How are they incentivized to disagree with the original diagnosis? A consumer getting conflicting advice wouldn’t simply trust the 2nd opinion, they would seek out a third, fourth, and so on, until they reached a conclusion. A consumer getting an incorrect consensus would receive inappropriate care that doesn’t fix their health, leading to additional care. If the 2nd opinion conflicts with the first, then additional diagnostic cost is necessary, but much less than the cost of inappropriate care. Either way it would cost the employer and/or insurance company more money, so they want to hire an accurate diagnostic (either 2nd MD or a competitor).

    • Al says:

      @Don M. “This hasn’t removed conflict of interest. It merely inserts another entrepreneur (2nd.MD) into the health spending equation – more administrative waste.”

      I don’t understand how you draw that conclusion. Assume for a moment a patient is seeing a poor set of physicians that are not as up to date as they should be or the physicians are HMO docs where the incentive is to under treat. Would this type of second opinion be of help? Absolutely. Extrapolate from there.

      How about simply alleviating some of the concerns of the patient?

      Physicians do the same thing when they are uncertain about certain problems. They frequently talk among themselves and sometimes call for expert help from those they knew in training or elsewhere.

      My understanding is that this type of consultative service is open to the individual as well as companies. To do that means to me that the service will be fulfilling the individual’s needs. Why would the sub-specialist on the net give less than his best advice? The only way I can see this devolving is if the patient is pushed into using the service. But, I think if it is fully in the marketplace then that type of action will be exposed relatively quickly.

      It sounds like you had a knee jerk reaction to paying more for medical care. If not then can you explain. I initially had a knee jerk reaction as well so I am not using that reaction in a pejorative sense.

      I think this is a great idea and if left entirely in the marketplace individually controlled it will act as an rudder to help keep medical care on course.

  7. Bob Geist says:

    John, you stumbled this time–so a long explanation. You forgot that physicians profess the >2000 year Oath that essentially says we have a covenant of loyalty to the patient’s interests first, ours are second. This professional culture has had many ups and downs over the millennia, e.g., Soviet Russia where the docs were employees of the state and carried out the states dictates…or else (see Pellegrino: JAMA. 1995;273 (20):1622-3.) In the US since the early 1900s, State laws have backed the Oath by preventing split fees–in other words docs could not be paid for the volume of orders for care (at the time, more) but only for the service they rendered. The HMO Act of 1973 legalized paying for fewer orders for care (capitation “risk”). The FTC broke the back of the AMA code of ethics under court order was changed in 1981 to allow P4P, i.e., pay for fewer services hidden by the sophistry of pay for “quality” and so forth [JAMA. 1995;273:330-5.] The 2010 PPACA cost control mechanics are to be bedside ACO gatekeeper doctors, whose pay is contingent on the clinic’s “cost of care index”, i.e., “good” corporate financial behavior of a double agent care-giver insurance underwriter rationing care…or else. Lousy pay has driven clinicians to own the things which they prescribe–e.g., the chest x-ray machine scandals. The government once believed in 2nd opinions to stop such excesses by “avaricious” docs–e.g., the 2nd opinion program before TUR of the prostate that bombed and is now defunct. It’s now all about cost control contingent on “incentive” payments for volume of orders for care by 3rd parties, aka bribes [Webster’s New Collegiate Dictionary. 10th edition. “Bribe.” Springfield, MA: Merriam-Webster Inc.; 2000:142]. These have been legalized with 1973 and now 2010 PPACA law that have overturned anti fee splitting State laws. 2nd opinions cannot make medicine moral, albeit, I have no problems with the excellent program you describe. The real problem is that law simply legalizes corrupting professional behavior that is no longer protected by law–this is cost control at any cost and a disaster for patient protection. Thanks, Bob

  8. Greg Scandlen says:

    I have never bought the premise. Information asymmetry works in both directions.

    Yes, the physician knows a lot more about disease and treatments than the patient (though the gap is shrinking these days), but the patient knows far more than the physician about his own medical history, behaviors, and resources than the physician does. So the transaction becomes a negotiation between the two and that negotiation must be based on mutual trust. Trust can be built only over time and experience.

    This “remedy” assumes the patient is nothing more than a handful of statistics and ICD codes, not a fully-realized human being. It doesn’t even give the patient the dignity of a personalized meeting.

    Further, this “remedy” assumes that physicians are indeed greedy opportunists who prescribe treatments merely to enrich themselves. This has never been supported outside of the Dartmouth distortions.

    We’ve been paying for second opinions for decades now, and they haven’t improved patient care a whit.

    • JD says:

      A personal relationship with your doctor isn’t more important than timely, accurate care. Who cares if you are “nothing more than a handful of statistics and ICD codes”, if you receive the appropriate treatment?

      Why are we working? To make money. We are all “greedy opportunists”, that isn’t a bad thing. The incentive to not rip people off is based entirely on “greed”. If you deal with people unfairly, you’ll lose money in the long-run because people won’t trust your service.

      Second opinions do improve care. At the very least they provide the valuable incentive to doctors to deal fairly, lest their reputation suffers.

      • Greg Scandlen says:

        JD,

        Where is the evidence that people are more likely to receive “appropriate treatment” from a doctor who doesn’t know them and they don’t trust? We are far more than a collection of symptoms. Technology that fails to account for that is technology that is doomed. Technology is only a tool. It is not an answer.

    • Al says:

      “this “remedy” assumes”

      Greg, I think you know my opinions with regard to the very special doctor/patient relationship, but in this case it is different. The doctor/patient relationship is preserved and new information might be provided.

      We have to remember that sometimes it is good to seek a second opinion from more distant sources as they might think differently or be more academic or less academic. Those variations in advice are good because they are additive to medical knowledge and one might not have the expense of a face to face visit that includes more costs than just the physician’s fees.

      • Greg Scandlen says:

        Maybe so. I have no problem with providing both the physician and patient with additional information. But I am alert to any effort to dismiss (as JD does) the vital importance of patient buy-in (investment, commitment or whatever) to the course of treatment. My goodness, how long do we have to scratch our heads over placebo effects before we realize that external treatments are only half the battle. The other half is the emotional state of the patient.

  9. August says:

    This is a great example of information technology being used to provide services that were impossible before. Innovation.

    There is also potential to run the doctors first option through Watson, IMBs medical computer.

  10. Toral says:

    Innovation is very important in a market-based economy. This is a good example.

  11. Chaz says:

    I can’t see many employers signing up for this program until, at least, their is concrete evidence that these programs work (other than the founder’s self-serving statements).

    In the self-insured plan context, I don’t see how this is any different that a third party administrator’s U/M services, except that here, it is voluntary on the part of the employee(?) and the plan/employee is not bound by the determination of the 2nd opinion(?)

    This program is likely a group health plan subject to the administrative requirements of ERISA and HIPAA, as well as other laws, which will cause employers to incur some costs other than the actual fees for the program.

    Do employers pay a fixed capitation fee up front or only when am employee gets a second opinion?

  12. David Hogberg says:

    Greg, good point. I’d add that government regulations only add to the problem of asymmetric information for the patient. So nnow the patient not only has to worry what the physician’s interest are, he also needs to know how government regs are impacting how his physician behaves. Of course, who is going to be more familiar with the regulations–the physicians who deal with them every day or the patient who does not? Every time I’ve interviewed a patient and I’ve explained to them some regulation that may be impacting their care, I usually get this response: “I never knew that!” Didn’t have to inform the physicians about the regulations, since they are usually the ones who informed me about them.

  13. Chuck says:

    Dr. Goodman

    This is partially helpful. Informed decision making is part of the solution. The better informed are these telephone cunsultants about the nuances of particualr condition and treatment recommendation the better.

    Financial accountability is another part of the solution. It would be better yet if the patient paid instead of the company. Otherwise there is still misallignement of incentives with the company as the third party.

    It would be better yet if the telephone consultant spoke with the treating physician and shared the medical record. But, then they will be part of the case and more vulnerable to being sued. Their charge will go up when they are sued.

    It is a great minority of physicians who over order lining their wallets. The standard by which we must perform is, immediacy and perfection and we risk be sued into personal financial oblivion if not. Meanwhile the government has criminalized much of our work if we don’t get the bureacracy just so requiring high overhead to be met in order to continue to care for the folks.

    The closer we get to personal accountability of the patient and the doctor, colapsing 3 parties into 2, the closer we will be do the solution

  14. James R Chaillet, Jr. ,MD says:

    I don’t buy the concept. I assume the goal of 2nd.MD is first to make money and, then, second, to improve the quality of care and third, to lower the costs of care. The company’s underlying assumption (heard this before)is that, because doctors are reimbursed on a fee for service basis, they will do something rather than not do – possibly causing harm to the patient and the patient’s wallet.

    That’s true. I see it now from a primary care perspective and I saw it, as a medical director of an HMO, when specialist moved from a fee for service mode of compensation to a captitation model.

    The problems with this approach are: the additional costs of the entrepreneur which all the employees ultimately pay for}; a bias by the employer at least to lower health care costs; the obvious fact that an employee can pay on his/her own to get a second opinion if he/she wants (think indecisive employee or family member) and not make other employees pay for if; and last but not least it’s a bandaid for the bigger problem of decreasing trust in physicians by the public and a growing corruption within, at a minimum, aspects of the medical profession driven by greed, envy of higher paying professions (law, finance)and the moral sapping effects of the third party payers.

    So, you’re a young neurosurgeon. In the old days you were respected for your years of training, your long hours and ability to perform live saving surgery. Now, you’re a provider, there are more of you, there are fewer opportunities to save lives – helmets, trauma centers, better brain and nervous system imaging and oncology. So what’s a neurosurgeon to do to justify the years and expense of training.? Spine surgery and get in good with the makers of medical devices. And then he/she can start to make what the managers and c-level people of the insurance companies make. See? bigger problem.

  15. Clinton says:

    Our first goal at 2nd.MD was not to make money but ensure that no family has the same struggle that we did. After my daughter suffered stroke at birth we spent months trying to find a doctor who had significant experience with her condition. The first doctor said she would never walk or talk.
    We never set out to reduce healthcare costs, only to just ensure that people had quality, unbiased expertise. Before 2nd.MD, only wealthy families could fly to a top academic institution to get quality expertise. Now my wife and I can sit with a top pediatric neurologist from Miami Children’s, amongst others, and get answers on the most complicated conditions from a handpicked, up-to-date doctor.
    The greatest surprise in the business model was that when people were connected to a expert specialist who is compensated for their time, not for treating or prescribing, amazing things happened…people uncovered many more options, understood their conditions better, some cancelled surgeries and others were greatly relieved to hear they were already in good hands.
    Companies understand that 30% of their healthcare costs are on unnecessary procedures and for the first time had something to counteract this trend. Other companies love the idea of doing something that can greatly impact the quality of their employees. Executives have often enjoyed better access to care but now every employee can have direct access to leading doctors.The best part is that as we care for the employees and get them the best advice, the employee and employer benefits. Doctors are treated well and can now help people across the world with only their laptop. Doctors don’t care if the care is more or less expensive, only that its right.
    It’s not yet perfect but trusted information has never been easier to access and we know that can make a difference to millions of employees and the companies they serve.
    The best part is that my daughter is walking and talking and 95% recovered from her stroke. Thank goodness we didn’t stop at the first doctor.

    • diogenes says:

      What nonsense. You’re in Houston, all you had to do was call the head of neurology or pediatrics at M D Anderson. You’re not getting to “sit with” anyone, if you’re lucky that top specialist will look at your chart and maybe talk to you for 5 minutes.

      • Clinton says:

        diogenes, 2nd.MD appointments are 20min at a minimum.
        You dont think we tried to call every major centers pediatric neurologist. Good luck on getting the head or neurology on the phone. The receptionist will laugh at the request. There wouldn’t be a 3 month waiting list if that were the case.

      • Al says:

        Clinton, I think it is a fabulous idea despite what I am hearing from many on the list. Of course that depends upon appropriate screening of physicians and a totally free marketplace where these consultations are patient generated and completely private. It is additional brainpower that does not replace the current doctor/patient relationship and can come from any region of the country. You might want to include ratings from the patients with suitable explanation along with any further comments the physician would want to provide. I wonder if patients would want to contact each other as well. I have seen patient groups that have more combined knowledge than many medical specialists.

        Last time we felt the need for a second opinion to validate those of superb physicians his fee for just the office visit was $800. That fee did not include air transportation, hotel, restaurants and ground transportation. It so happened that I believe unknown to each other the same doctors were the treating physicians at one time or another of the same President. That would be unaffordable to a lot of people.

        Likely the visit could have been done electronically since all the pertinent data already existed and was of high quality.

        Don’t let the service deteriorate so that the only reason for the call is to save money for the insurer or the employer. I think with the ACA and ACO’s it might be a very valuable agent of protection since the incentives of the ACO lean towards not treating.

        I give you 5 stars.

      • Al says:

        Diogenes, since in many institutions politics plays a part in being the head of a department what makes you think that the head of a department is the best physician? Maybe he is the best politician or is the best at self promotion. Sometimes the most sought after well known specialists are already well past their prime by the time you recognize their expertise. Sometimes they are well know and respected for work that has nothing to do with your particular medical issues.

        • Big Al says:

          Al, I have an idea. Instead of all patients having to purchase professional 2nd opinion services from 3rd party businesses like 2nd Md., why don’t we set up a national advisory board … say like a Patient-Centered Outcomes Research Institute, composed of patients, doctors, hospitals, drug makers, device manufacturers, insurers, payers, government officials and health experts, which can make recommendations on relative health outcomes, clinical effectiveness, and appropriateness of different medical treatments which procedures. Programs like Medicare can implement these recommendations into their reimbursement programs … thereby looking out for the patient without them having to purchase 2nd opinions.

          Oops, I guess the PPACA just did that. Sorry for disturbing your free market sermon. I won’t check in or bother you on this post again.

          • Chuck says:

            Big Al. That Obamacare bureacracy will grind itself to a halt. Don’t hold your breath waiting for it to do something useful. Your post list the army of bureacrats. Good luck with their cook book.

          • Al says:

            Committees, bureaucrats and high priced legislation don’t provide medical care, doctors do. The ACA makes this type of program that much more necessary for a person in an ACO has to worry about under treatment where there is no paper trail that is seen when care is provided.

            It is kind of hard to believe that you think a guy in Washington can actually say what you need from a cook book without even seeing your records. People are individuals with different needs and requirements. You seem to favor a healthcare system that is geared to treating widgets.

  16. Charlie Bond says:

    Hi John,
    While I agree the asymmetry in health care delivery is a problem, the greater problem is the asymmetry in health care pricing. The patient does not know (and virtually never asks) the price of services being delivered. Even if he or she did, the amount reimbursed by the insurer would still be an undivinable mystery knowable only when the EOB arrives.So most patients do not and cannot know what they will be paying out of pocket (much less what their insurer will pay).

    We have further encouraged this asymmetry by exempting health plans and health insurers from antitrust laws. I talked for hours with Milton Friedman who seemed to be convinced to his dying day that “the market” would correct these asymmetries. It hasn’t and won’t–even using 2nd MD, a concept I applaud.

    Unfortunately, whoever has provided 2ndMD with its legal advice that diagnosing telemetrically is not practicing medicine is wrong. The rendering of any opinion regarding a patient’s condition is considered “diagnosis” whether done in person or at a distance. If a doctor “gives advice” based on his or her medical knowledge, that is deemed the practice of medicine. Accordingly, medical licensure would be required in the state where the patient is located. Having spent over half my forty years in law practice dealing with telemedicine policy, I wish their legal advice were correct, but sadly the Medical Boards have adopted the opposite view.
    I am afraid, therefore, the answer to asymmetry is not telemetry.
    Best regards,
    Charlie Bond

  17. Gary Fradin says:

    Disagree. Second opinion services (several exist) simply substitute the opinions / values of some docs for others. Price is only 1 factor in a docs decision making, otherwise we wouldn’t see such huge treatment variation rates.

    John overstates the argument by about a mile. Patients still delegate decision making to ‘the man’.

    Better counter to Arrow: a shared decision making model, where patient learns the key questions to ask (physician and other advisors) and gets sufficient information to make an informed decision.

    Remember: 85% of medical decisions involve choice. Arrow’s argument still holds, but now you have 2 docs with asymmetric info giving advice, though sometimes disagreeing.

    All the shared decision making research shows that outcomes improve, and prices generally fall, as patients get more involved.

  18. Rob Tenery, MD says:

    It is important to remember that a second opinion, even by a physician from Harvard or the Mayo Clinic, is not always more likely to the better than the attending doctor. Being there and knowing the patient goes a long way in determining the ‘best’ clinical option.

  19. David Hadley says:

    Hey John,

    This is one of the very few things you have written that I don’t really like. I am not arguing with you about 2nd MD, it sounds like a good service and a good idea.
    My more fundamental issue with what you wrote is that it gives too much ground. There are many markets besides medical care characterized by information asymmetry. Most professional services – architecture, accounting, attorneys (and I haven’t left the A’s yet…) all have practitioners that know a lot more about their business and their services than their clients. That doesn’t stop the market from working, but it does affect terms of contract etc.
    I think the more appropriate analogy relates to the third party payment issue. Insurance companies hire claims adjusters because they are third party payers and their financial incentives are not aligned with the insured. Both insurance carriers and the insured should be availing themselves of second opinions to protect their relative interests, but that is not a sign of market failure, that is a feature of moral hazard in all insurance markets. One man’s opinion.

  20. Rick Jackson says:

    John,

    I read your letter today about how physicians have incentives to order tests and other procedures. In the last 15 years Stark has eliminated most of these items. In fact, one of the unknown facts about ObamaCare is that physicians no longer can own a hospital if they didn’t already in 2010. Therefore there will never be another Mayo Clinic or Cleveland Clinic where the initial physicians owned the hospital.
    In a national survey we tried to identify the areas that could be variable compensation. As you will see most physicians are on fixed income and the majority of variable income is related to seeing more patients or doing more procedures. This survey shows that minor part of compensation for all physicians is related to tests. It is illegal to make money off of admissions to hospitals, referrals to diagnostic centers, drugs, etc.
    Additionally, in a press release we calculated that the total compensation of physicians is only 8% of overall healthcare costs. If they worked for free, we would have a problem. Another press release compares our physicians compensation to the overall cost of healthcare and it is among the lowest as a percent of any other country.
    Another point is that the problem with healthcare is that neither the seller or the buyer knows the cost. Most physicians have no clue what tests admissions etc. cost. Therefore, how can they even choose what is the best course of treatment, much less the patient.

  21. Vince says:

    I applaud the concept and the reasoning behind the creation of 2nd MD. As a physical therapist I often council patients to get a 2nd opinion before they undergo an expensive and time consuming procedure. My hope is that they stay with the 20 minute minimum consult. I also say to my patients that we treat the patient and not a picture. The 20 minutes will hopefully allow for the physician to obtain a quality oral history because that is where much of the necessary info is picked up. If this can maintain the original concept and offer patients an easy 2nd opinion it will save costs, as well as improve overall quality at the initial stages. The more popular this becomes the more the original physician will want to make sure he is right. He will not want to consistently be over ruled by the 2nd MD. Any thing to help us in the field step up our game is good for the whole profession. My fear is that it will turn into some of the so called “Peer Review” which is only there to deny treatments and save money for the employer or the insurance company. If the rationale stays true then great.

  22. Bob Geist says:

    Second opinions are fine, but they are no cure-all for cost inflation driven by powerful political forces.

    Rick Jackson has analyzed the problem best (above): “…we calculated that the total compensation of physicians is only 8% of overall healthcare costs. If they [doctors] worked for free, we would have a problem…compare our physicians compensation to the overall cost of healthcare and it is among the lowest as a percent of any other country.”

    Bob

  23. jmitch says:

    Dr. Goodman: If a patient comes to my ER with a severe headache, and I order an emergent MRI, how does 2nd MD work for the patient in that case?

  24. Bubba says:

    Doctors’ gross income represents 8% or 10% of medical expenditures, but that certainly isn’t the problem we face in our medical-industrial complex.

    Doctors’ net income is probably only half of their gross income. The problem is that to get that 5% of medical spending that doctor’s enjoy as their net income or take-home pay, they are responsible for ordering the remaining 95% of expenditures — and they have the incentive to order as much as is feasible to increase the magnitude of their 5% net of health care expenditures.

    Heck, I’d be willing to double doctors’ take-home pay if only they would help us patients lower spending on the remaining 90% of care delivered.

  25. Vince says:

    Bubba hit the nail on the head. If Physicians and other providers were reimbursed for their time and expertise rather than what tests, procedures they ordered we may have better outcomes with less costs. Give the Dr’s the incentive to spend more time with their patients and allow them to make accurate Diagnoses and discuss treatment options with their patients instead of hurrying through the appointment, ordering the tests etc and going on to the next patient because volume is needed to pay the bills. I know no provider who would not be on board with that. I believe that if we had more free market opportunities the insurance companies would see the incentive to do just that and we would see these benefits.

    • Clinton says:

      We completely agree. We pay the doctor well for their time so they can take the time to fully understand a persons condition. Insurers wont pay them but we can and its working. Less unnecessary tests and procedures; higher satisfaction for employee and doctor.

      • Al says:

        Does the patient pay you and then you pay the doctor?

        Are the doctors fees set by the doctor?

        How is the overhead of the company covered?

  26. David C. Rose says:

    John:

    I guess I don’t feel the need to accept the premise. In almost everything we buy there is a tremendous information asymmetry. The farmer, canner, wholesaler, and retailer of green beans knows far more than I do about farming, canning, and distributing green beans, but there is no Arrow-like fretting about asymmetric information going on there. Why?

    The answer is simple. Competition makes such fretting unnecessary. As long as there is competition among farmers, canners, distributors, etc., we consumers don’t suffer very much from such information asymmetries.

    In medicine it is true that a doctor knows much more than a patient about this or that illness that this or that patient has. Before the mid 70s most insurance was fee-for-service with large deductibles and persistent co-insurance payments (the 20% or so the patient had to pay even after the deductible was met). So patients were paying something at the margin so they paid attention. Patients talk to their family, friends, and coworkers who have other doctors. Doctors who consistently take advantage of the information asymmetry end-up being consistently more expensive. Since people could easily move from doctor to doctor, competition between doctors for patients kept such behavior reasonably in check (perfectly in check would, of course, be inefficient). Today that discipline would likely be even higher with web based discussion lists and consumer reports magazines and the like, as they lower the cost of making comparisons.

    Of course the more competitive such a market is (ease of changing doctors, knowledge of other patient experiences with other doctors), the better the job competition does rendering information asymmetries moot.

    But what have we been doing over the last 30 years? We’ve been reducing competition between doctors for patients through discount lists made necessary by first dollar coverage policies. First dollar coverage has also removed the next best informed person, the patient himself, from the story because too often he had too little skin the game to bother (low or zero deductibles with low or zero co-insurance payments).

    A common mistake in economic analysis is to zoom in too tightly on a margin. This is a holdover from how we teach. We focus on the margin so as to reduce the number of moving parts in the story because students have to crawl before they walk, as it were. Since the economy has very many moving parts, this trick is especially important in economics.

    I think Arrow zoomed in a little too tightly. While what he said was correct as far as it went, it treated an unfinished story as over. Competition for patients by doctors occurs over a period of years spanning innumerable illness margins, and produces a cost to opportunistic doctors at emerges at an entirely different level of analysis.

    Arrow is arguably the most brilliant economist of the 20th century. I think his work proving the existence of a competitive equilibrium is still underappreciated for how it properly frames public policy analysis. But nobody bats a thousand.

  27. Kenneth J. Arrow says:

    Hi colleagues,

    The statement that competition may mitigate the effects of asymmetric information is certainly true, and I don’t think I ever said anything to the contrary. I do maintain that usually, and certainly in the health industry, competition is at best a partial solution and does not obviate the need for public policy to add to market discipline.

    Professor Rose’s argument that the customer does not have information about the production process is irrelevant. All the customer cares about are the quality and utility of the goods he buys. When it comes to green beans, he or she is as fully informed as the seller.

    Let me modify the example. Consider the purchase of a complex consumer good, say an automobile. Here, there may well be asymmetric information. The company can keep records of complaints about its products and may know fairly well the probability of a failure in some aspect. The buyer knows nothing at time of purchase and may acquire only a limited knowledge from experience. If there is a failure, our system relies on a non-market mechanism, namely, civil litigation. This could of course be countered by the seller’s announcing in advance the possibility of failure, as pharmaceutical manufacturers do regularly. The point is that competition is only a partial substitute for asymmetric information. The possible disutilities and the asymmetry of information are much greater in the case of medical services.

    Further, the application of asymmetric information theory in my work was directed primarily to the relation between insurers and insured. This is a standard issue in virtually all insurance but is especially acute in the health field.

  28. David C. Rose says:

    Colleagues:

    I agree with Professor Arrow that my green bean example is a bad one. A better example would involve something whose quality differs markedly by transaction and for which only one party was privy to such knowledge – like the market for used cars.

    I think our disagreement is a matter of degree, not a difference in kind. We both think there is an asymmetric information problem associated with health care and we both think that competition mitigates the effects of this problem. How effectively it mitigates this problem is the issue.

  29. Chuck says:

    Competition and the information age were beginning to solve the information assymetry until the Gov’t began bribing the industry to implement not ready for prime time EMRs. (old technology trapped in onsite hardware without design in mind for data mining) These factros with still rise up to solve it but will be delayed by the gov’t interference.

    I for one find my quality and performance data and not only report it but market it.