Moral Hazard in Healthcare — Part 2

I’m a guest worker (fully documented!) at two facilities: a suburban practice and a small city way out in the prairie. Both practices are booking a couple of months out, so there’s a line to get in both places. I get paid a bit more out on the prairie; I guess not everybody sees the beauty of that little city (although it is indeed beautiful).

In the suburbs, I mostly see trivial problems. The worried well. People who were already evaluated once and want a “followup” or second opinion. Anxiety. Minor problems that a nurse practitioner probably could have taken care of (while adding value in the process; NP’s are awesome). Out on the prairie, I’m seeing patients with critical or complex problems, most of whom probably should have been seen sooner.

Question: which facility needs to recruit a permanent specialist?

Both think they need a permanent doctor, based on the lines. But I think it could be argued that the suburban practice doesn’t really need another specialist. And the prairie gig might need two more.

One test of this would be to see how the patient reacts if they had to pay out-of-pocket. Temporary workers are expensive, so it would likely be at least $200 for the visit (I wouldn’t know, I get paid by the hour). Most patients in the suburban practice would not likely find that to be a good deal. I paid $200 for that??? Out on the prairie, many patients would find that to be a great deal. Finally, somebody understands!

Yet the out-of-pocket expense — a trivial amount — is the same in both places. And weirdly, Medicare (and by extension, the private insurers who have adopted the Medicare payment scheme, which is all of them) pays LESS out on the prairie than it does in the suburbs.

I have no idea what my evaluation should cost, because healthcare does not have a price discovery mechanism. It never has. (You might say, back in the 1920’s it did; but back then, we couldn’t actually do anything. It’s a whole different ballgame now.) Yet the system functions as if it is responding to a market-clearing price.

The tricky part is, there are several “prices” at play here. The price paid to the provider, which depends primarily on Marx’s labor theory of value, and secondarily on location. And the price charged to the consumer (if any) which takes the form of either a deductible, co-insurance, or a co-pay.

A great deal of confusion arises because the price paid by the consumer is radically different than what is paid to the provider, and neither one necessarily has anything to do with market reality. If we under-charge the consumer — or more realistically, if the marginal cost to the consumer doesn’t reflect in some way the marginal utility of the product — then we can expect lines to form, regardless of whether or not the supply of product is provided in excess (as we see in the suburb) or in deficiency (as we see in the prairie). And the price paid to the provider — which is more or less arbitrary, in that it does not take into account either demand or supply — isn’t sending the right signal. The price paid to the provider should be higher, if the market is demanding more; and less, if the market demands less. That would incentivize providers to move from the suburb to the prairie, which is arguably one way to solve this problem.

As you can see, the healthcare market is inefficient. In theory, healthcare is intrinsically inefficient, due to information asymmetry. Granted, there is information asymmetry in every transaction. But it is the defining feature of healthcare.

That’s said to arise due to the doctor’s expertise and experience; that doctors know way more about what’s going on than the patient. But in reality, information asymmetry and incompleteness pervades the system:

  1. The patient doesn’t know what’s wrong with them, or what treatment is available.
  2. The doctor doesn’t know what’s going on with the patient. It’s always a matter of decision-making in the face of uncertainty.
  3. The insurer doesn’t know what’s wrong with the patient, OR what treatment is available. (That’s less true now than it used to be; insurers have access to national practice standards that doctor’s don’t always follow. Also, insurance companies know what the market is, they know for example what the going rate is for an MRI scan, or a tablet of Prozac. That’s good information, and exemplifies how managed care can add value. )

Health insurance is a solution to variance, it is not, by nature, a response to market inefficiency. In fact, it’s possible that insurance might make an inefficient market even more inefficient, if it’s not done right.

Next, Part 3: the all-you-can-eat buffet

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