Information is essential in choosing how to use resources to meet your needs. That is why Gov. Tim Pawlenty’s latest health care proposals are a useful contribution. A shared Web site with pricing information from different health plans, quality data for providers and the ability to keep medical records online are no cure-all for our health care problems — and the governor makes no claim that they are. But regardless of whatever other changes are adopted, they are a step toward making information more accessible and streamlining paperwork. The proposed changes also pose textbook illustrations of simple economic principles.
To make good decisions, consumers need to know all the likely results, both positive and negative. Although the ideal of complete information is seldom fulfilled, generally, the more information, the better. Information often is costly to compile. Pure free markets devote insufficient resources to generating useful information because any single individual or company often bears all the cost of assembling it, but the benefits spill over to many others who make no payment.
If people knew more about the treatments available from various providers, their cost and their effectiveness, they could make better decisions about what health care they procure. If accurate patient information were more rapidly and uniformly available at all points in the chain of treatment, providers could make quicker and more effective decisions. But progress in these directions is halting.
This is a classic case of what economists call an “information problem.” It is one way in which free markets can fail to bring about a societal optimum. While monopoly power was long blamed as the principal cause of market failure, over the past 25 years it has become clear that information problems are a more pervasive challenge.
Society would be better off if it produced and disseminated more information, but that won’t happen without government action. In some cases, government can assemble information itself, as with hurricane warnings or epidemiological detective work. In other cases it can facilitate action by private-sector entities. Pawlenty’s initiative falls into the latter category.
Providers have rational reasons for hesitance in publishing fee schedules and data on treatment outcomes. Both can be misinterpreted. Providers may have legitimate reasons for different cost structures. Some have to cover the costs of a teaching or research function. Some must accept more patients who never will pay for the treatment they get. Some get much sicker patients than others, even within a standard category.
Often, in a variation of “the prisoners’ dilemma,” if a few institutions hold back from disclosing such information, all the rest will, too. Here a government mandate or simple encouragement can motivate cooperation.
Sometimes there are “coordination problems.” If you want a common format to facilitate access to medical records, who decides which format to use?
Here government can provide coordination — coaxing or knocking heads together as needed — to bring agreement on some standard.
Making the right decision is important, because once made, “path dependency” can set in and change becomes expensive. The QWERTY keyboard and VHS video recorder formats are frequently cited as technologies that were not necessarily superior, but once adopted became dominant.
Confidentiality is always a concern in personal health records. Society benefits if all providers have quick to comprehensive records, especially in an emergency, but no one wants hackers to learn of every test or treatment someone may have gotten over decades. Here government needs to tread carefully. It can encourage adopting some format or database program, but if security safeguards eventually show any flaws, the government inevitably will bear much blame.
People who have worked in other industries often are flabbergasted by the antiquated records systems still used by many health providers. This reflects a lack of active competition in health care. With a limited choice of providers, few consumers will make the modernity of a record system a determining factor. And so, providers under perennial financial pressures don’t face external incentives to upgrade their systems.
The governor’s work merits applause. But the hard tasks remain to be done in reforming health care.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.