Economists have been slow to recognize the importance of information to efficient resource use.
Reliable information is valuable. It generally takes resources to assemble. Inaccurate information is costly because it fosters bad decisions that waste resources. A recent government Medicare study is an interesting case study.
The Government Accountability Office studied the accuracy of information given to consumers about Medicare prescription-drug plans. Investigators made 900 phone calls to 10 large companies that offer such plans.
The results were discouraging. Plan representatives provided accurate and complete information only one-third of the time. They could not answer 15 percent of the questions. Some 22 percent of responses were wrong, and 29 percent were incomplete. Frequently, different representatives of the same plan gave widely different answers to the same question.
The complexity of these plans, introduced with the Medicare prescription-drug benefit in 2003, is an obvious cause for confusion. Dozens of companies offer plans, and most companies offer several choices. Beneficiaries in many geographic areas must choose among 40 to 50 competing plans. More than 1,400 plans are offered in all.
On the surface, this should please free-market economists. Economic theory tells us that having many producers is good. Choice for consumers is good. Competition is good.
This is all true, as long as information is not a problem. If consumers understand all the choices available, then robust competition and a rich range of options let them get the greatest possible satisfaction of their needs with the least expenditure of resources.
However, most Medicare beneficiaries do not have good information about their choices. Not only do they face a plethora of competing plans, but each plan is also complex, with different levels of coverage for different drugs. Moreover, providers can change the terms of their plans at will and frequently do so. It is not really surprising that even employees of the providers often are poorly prepared to give full and accurate information.
Community groups and senior-advocacy organizations offer counseling to help Medicare beneficiaries find the best plan. But many still find the process baffling. Studies show that many choose inappropriate plans and that confusion about plan choices has been a deterrent to participation.
If the large number of plans confuses providers and customers alike, why are so many offered? There are a number of explanations.
The first is that plans are engaging in price discrimination — attempting to offer slightly different products to potential buyers whose willingness to pay differs. Airline tickets and cell-phone plans come in similarly confusing permutations.
The profusion of drug plans also reflects the strategies of laundry and dish detergent manufacturers. Often one firm will sell six or more brands that appear to compete, but do essentially the same thing. This may be price discrimination. It also may be a tactic of “fill the shelves. If they don’t like one of our products, the next one they reach for is likely to be ours also.”
Skeptics may see cynicism triumphing over rational strategizing. Drug-plan companies know that consumers are confused. If they cast their nets broadly enough, they are going to haul in some suckers no matter how good or how bad a plan they offer.
Whatever providers’ motivation, the new drug plans certainly seem to be an example of a situation where very imperfect information is leading to a less-than-optimal outcome. The question is what, if anything, government should do about it.
While one may argue that consumers are just as confused by the clamoring offers of cell-phone plans, there is little call for government regulation on those. Drug plans are different in that the products themselves were created by the federal government when the 2003 act was passed. Providers contract with the federal Centers for Medicare and Medicaid Services to offer plans.
One useful measure would limit changes for people already enrolled in a given plan. A provider would be allowed to close the plan to new enrollees, but would have to offer services under existing terms for some minimum period, for example, one, three or five years.
Penalties for inaccurate information would be another step. The government could conduct periodic audits, like the one just done by the GAO, with fines for providers whose representatives fail to provide complete and accurate information.
One should also note that fiddling with details of the drug-card program ignores larger problems with the 2003 act, most notably its ban on Medicare negotiating lower prices for medicine purchased with benefits under the new law. By comparison, fixing information problems may be small potatoes.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.