[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

THE MARKET FOR HEALTH INSURANCE
The market for health insurance provides an illustration of the impact imperfect
information can have. It is estimated that about 45 million Americans are without
health insurance, and even those with insurance often feel dissatisfied with their
coverage. Understanding the problems with health care and the policy debates that
these problems have generated requires an understanding of the market for health
insurance, a market in which information, or rather the lack of information, plays a
major role.
The United States spends a larger fraction of its national income on health care
than most other developed countries, but its figures for life expectancy are lower and
for infant mortality are higher. Information problems and associated market failures
are a large part of the reason. Moral hazard—the reduced incentive to economize on
health care expenditures when a large fraction of the tab is picked up by insurance
firms—is one source of market failure. Adverse selection—the attempt of each insurance
firm to take the lowest-risk applicants, leaving those with high medical costs to
others—is another. In some countries, the first of these problems is addressed by
rationing the availability of health care and the second is overcome by having a
universal health care system that covers everyone, not just those at low risk.
In the standard model, consumers are assumed to be well-informed. But consumers
go to the doctor for information, to find out what is wrong with them.
Moreover, they typically must rely on the doctor’s advice. Economists worry that
under a fee-for-service system, in which doctors are paid for each of the services
they perform, there is an incentive to provide excessive care. Excessive here means
the marginal cost exceeds the marginal benefit to the patient. Making sure that
health care dollars are used efficiently requires that the marginal benefits of a particular
treatment, prescription, or procedure are balanced against the marginal
costs. Consumers can be expected to balance marginal benefits and costs when
they purchase most goods, but health care differs because consumers may lack the
information needed to assess the potential benefits of care and because those with
insurance typically bear only a small fraction of the marginal costs.
Today, more and more doctors work in “managed care” organizations, or HMOs,
where they are paid a flat fee up front. They then provide whatever care is needed
and receive no extra income from doing extra procedures. On average, doctors working
in managed care charge less and perform fewer surgeries, with no noticeable
effect on patient health. Critics worry that under managed care, doctors have an
incentive to underprovide services, since they receive no compensation at all for
providing care at the margin. Newspaper accounts of managed care programs denying
patients treatment have galvanized legislators to enact a patients’ bill of rights.
But while admitting that there may be occasional abuses, advocates argue that any
managed care organization guilty of repeated abuses would lose its patients.
Reputations can provide effective discipline. When employers provide a level playing
field between fee-for-service and managed care plans—contributing an equal
amount for each and making employees pay for the extra costs if they choose the
more expensive fee-for-service plans—more than half their employees, on average,
choose the managed care plan. Evidently, the employees do not feel that the benefits
of the extra services provided under fee-for-service are worth the extra cost.
340 ∂ CHAPTER 15 IMPERFECT INFORMATION IN THE PRODUCT MARKET