iii. Unequal information - doctors as agents

Moral hazard and adverse selection help to explain why a free market in health insurance is unlikely to be efficient. However, health care markets face even more fundamental information problems. We are now going to examine the problems caused by unequal information and the consequent role of doctors as agents for patients.

Monitoring the heart

"The pains in my chest intensified. I tried to remember if I was wearing sensible or frivolous underwear. I knew that within a few minutes all would be revealed. My doctor arrived looking unfamiliar in his Sunday morning clothes, and took me into a side room where he hooked me up to an electrocardiograph machine. There was trouble at t'mill. A lockout. The blood couldn't easily get into the heart. There was an obstruction of some kind. I was wheeled into Intensive Care, more of my frivolous underwear was revealed, I began to feel peculiar and for a split second I thought I was going to die.......So this is what it is like to have a heart attack, I thought. No clasping of the throat and dramatic staggering around before falling on the floor, more a sliding into helplessness and then a murky, confused leaving behind of your body"

Sue Townsend's description of how she felt as she had a heart attack emphasises the fact that we are often not in the position to make rational purchasing decisions about health care.

Rational choices

When you go into a shop to buy a CD you have enough information to make a rational choice: you do not need the shop assistant to tell you what you should buy. Going to the doctor is very different. You know that you perhaps do not feel well and that you have particular symptoms, but most people are not able to diagnose their complaint: they want the doctor to do that. What is more, you then rely upon the doctor to specify the treatment - if the doctor says you need an expensive operation then you buy it.

In the health care market information is not equally shared between buyers and seller, instead the seller, the doctor, has far more information than the buyer, the patient. This asymmetry of information undermines the separation of buyers and sellers.

This situation is not unique to health care but there are a number of factors which make this information asymmetry particularly acute there.

Information problems

Most medical information is technically complex and so not easily understood by a layman and this is made worse by the fact that many illnesses do not repeat themselves, so that the cost of gaining the information is very high. You could argue that the only way a patient could become fully informed would be by training to be a doctor!

The costs of a mistaken choice are much greater and less reversible than in other cases: in the worst situation if you make the wrong decision you will be dead. It is also often difficult to postpone treatment and so virtually impossible to shop around, and anyway how do you judge between different doctors' opinions?

Doctors as agents

The asymmetry of information makes the relationship between patients and doctors rather different from the usual relationship between buyers and sellers. We rely upon our doctor to act in our best interests, to act as our agent. This means we are expecting our doctor to divide herself in half - on the one hand to act in our interests as the buyer of health care for us but on the other to act in her own interests as the seller of health care.

In a free market situation where the doctor is primarily motivated by the profit motive, the possibility exists for doctors to exploit patients by advising more treatment to be purchased than is necessary - supplier induced demand. Traditionally, doctors' behaviour has been controlled by a professional code and a system of licensure. In other words people can only work as doctors provided they are licensed and this in turn depends upon their acceptance of a code which makes the obligations of being an agent explicit or as Kenneth Arrow put it "The control that is exercised ordinarily by informed buyers is replaced by internalised values"

Supplier induced demand

So if doctors behaved like some financial advisers or computer salesmen in the past and maximised profits without any limit from a professional code, we would expect supplier induced demand to be a very major problem. But any system of licensure strong enough to provide the internalised values that Arrow talks about is also likely to give the medical profession power to limit the number of doctors operating. Thus licensure and a professional code are in themselves also a source of market failure.