The End of Asymmetric Information

The most pernicious doctrine in health services research, the greatest impediment to clear thought and successful action, is that health care is different. Of course the medical sector has features not found elsewhere in the economy and polity, but then there is a uniqueness to every other industry. Each of the salient characteristics of health care, including professionalism, licensure, nonprofit organization, third-party payment, and heavy government regulation, can be found in other sectors, albeit not bundled in quite the same distinct and dysfunctional manner. The uniqueness doctrine hence proves too much. More importantly, the principle serves as a two-way barrier to entry between the health and nonhealth sectors. In one direction it discourages mainstream economists from importing the principles of industrial organization, game theory, and transactions costs to health care issues by raising a wall of acronyms and institutional trivia that impedes dialogue. In the other direction it fosters a complacency among the virtuosi of health policy analysis, allowing us to achieve fame and fortune in our small pond without fear of competition from denizens of the scholarly shark tank.

To some within the health care community, the uniqueness doctrine is self-evident and needs no justification. After all, health care is essential to health. That food and shelter are even more vital and seem to be produced without professional licensure, nonprofit organization, compulsory insurance, class action lawsuits, and 133,000 pages of regulatory prescription in the Federal Register does not shake the faith of the orthodox. For the sophisticates, however, the uniqueness doctrine does demand a foundation or least a pedigree. It is here that the theory of asymmetric information enters, gets comfortable, and decides to reside permanently in the intellectual edifice of health economics, medical sociology, health politics, and the other subspecialties of this faction-ridden but homologous research community. Which brings me to "Uncertainty and the Welfare Economics of Medical Care" (Arrow 1963).

This is a good article by a great economist, a creative application of the theory of risk and uncertainty to the thorny problems of the health sector, exactly the sort of boundary-crossing, barrier-penetrating work that opens the possibility of progress in thought and action. Would we have more of the same. But its effects on the field of health services research, for which the author cannot be held responsible, must be judged more ambivalently. The central proposition of his article, that health care information is imperfect and asymmetrically distributed, has been seized upon to justify every inefficiency, idiosyncrasy, and interest-serving institution in the health care industry. The article makes the protean claim that unusual contractual, organizational, and normative features of the health care sector derive from efficiency-enhancing responses to underlying informational limitations. This is a fecund alternative to the intellectual status quo of the time, which interpreted unusual institutional features largely as efforts at monopoly power. Yet it has served to lend the author's unparalleled reputation to subsequent claims that advertising, optometry, and midwifery are threats to consumer well-being, that nonprofit ownership is natural for hospitals though not for physician practices, that price competition undermines product quality, that antitrust exemptions reduce costs, that consumers cannot compare insurance plans and must yield this function to politicians, that price regulation is effective for pharmaceutical products despite having failed in other applications, that cost-conscious choice is unethical while cost-unconscious choice is a basic human right, that what consumers want is not what they need, and, more generally, that the real is reasonable, the facts are functional, and the health care sector is constrained Pareto-efficient.

Methodology

The heart of Arrow's analysis, the methodological prolegomenon from which all substantive claims derive, is the juxtaposition of the conceptual model of general competitive equilibrium with the organizational, legal, and normative characteristics of medical care. It is noted that a social system conforming to the competitive model...