Asymmetric Information in Healthcare
Asymmetric information is present in an economic transaction when one party possesses greater material knowledge than the other party. Typically, this occurs when the seller of a good or service has greater knowledge than the buyer. Think of it this way, one party knows everything about a topic and the other side knows nothing or very little.
As society continues to advance, we see more specialists that require years of training in order to understand the nuances of their job and industry. Look around and you'l find that this is common: teachers, police officers, consultants, attorneys, personal trainers, and others. This asymmetric information is an important part of a strong economy. These specialists can provide great value to those that they represent - imagine trying to interpret a legal ruling without the advice of a lawyer, or exercising for the first time without guidance from a trainer.
There are two major problems with asymmetric information, including adverse selection and moral hazard. Let's define adverse selection and moral hazard as they pertain to health insurance.
Adverse Selection: the tendency of those that need insurance the most, to seek and obtain insurance.
Example: Someone with a chronic condition is far more likely to enroll in an insurance plan than a "young invincible."
Moral Hazard: the idea that since someone with health insurance is protected from the cost of the healthcare they receive, they are more likely to use health care. It's a change in behavior in the presence of insurance.
Example: An MRI costs $3,500 and employee has a $50 copay. A doctor may diagnose without imaging, however, the employee may demand an MRI, since it "only" costs $50.
Now that we understand who has the most to gain by being insured, sick employees, and one of the reasons why 1/3 of all health insurance spend is waste, let's take a look at some of the other ways the health insurance industry capitalizes on asymmetric information.
Pricing Transparency: does anyone know the cost of a procedure before they have it done? The answer is most likely, "no." You don't walk into a hospital and see signs posted with the cost of an appendectomy or a knee replacement. In most instances, you don't see prices at all until you have received your bill. Even when you receive your bill the prices can be hard to understand or misleading because the bill is not itemized like a grocery bill, you see bundled prices. Of course, you don't really ask any questions... you needed the procedure, it was performed, and this is how much it costs, right?
PPO Discounts: if you are a group administrator, you have probably heard a broker or insurance company representative talk about "discounts." In fact, almost all they talk about is how large their network is and how deep the discounts are. I ask, have they every provided proof of how deep their discounts are? What is the discount based off of? Have you ever seen the PPO's contract with a provider? How is it that they negotiate these discounts? Is the group health plan getting the full discount, say 60%, or is the PPO passing along a 50% discount and keeping 10% for itself?
Broker Compensation: you will usually find the broker commission disclosure deep in a proposal. By law, broker commission must be disclosed to a client. Does your broker receive any other forms of compensation? Do they receive a bonus with a certain insurance carrier for maintaining a block of business? Bonus for bringing on a certain number of new clients? Do they receive compensation in the form of fees as an agreement with an administrator? Is the broker compensation agreement aligned with the interests of your organization? Or does the broker get paid more when you have a high increase?
PBM Transparency: there are only a few people outside of the PBMs that actually understand how their contracts are written. For example, do you have any idea how those companies make money? Do you understand how spread pricing works? Rebate retention? In-house specialty pharmacies? Clawbacks? PBM contracts are riddled with clauses that allow them to unilaterally manipulate the drug formulary in order to best serve their interests.
People forget that the health care/health insurance industry is a for profit industry. Even though some entities operate as "non-profits," those organizations use the same tactics, some even more aggressively than the for profits. Keeping this in mind, your consultant should be the one who levels the playing field on your behalf. It's no longer asymmetric information if your consultant is well versed in these fields, aligns their interests with yours, and works on your behalf to secure the most transparent options available.
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