What 3 health economics concepts are key factors in explaining our rising healthcare costs?

In a continuation of our discussion of health economics, we will explore the world of “Moral Hazard”, “Asymmetric Information” and “Self-Interest.” The inter-related impact of these three health economics concepts and their associated realities are key factors in our rising healthcare costs. These concepts, while easy to understand once explained, are not as easy to address because of vested interest by key stakeholders to perpetuate the status quo. Hopefully, you will find this blog interesting. I did, although I have my own vested interest in making that statement.

--- Tom

Moral Hazard

Moral Hazard is a term in health economics defined as the change in behavior as a result of someone else paying for the service. The easiest example would be the use of the hospital emergency room for routine healthcare needs. If your employer, Medicare or Medicaid were paying 100% of the costs of an emergency room visit for a sprained ankle, there would be a greater likelihood of overutilization vs. if there was a substantial charge (relative to income) that you had to pay. Ultimately, your “behavior” changed as a result of who was paying for the costs.

Asymmetric Information

Asymmetric Information is defined as information imbalance which, in the case of healthcare, is very relevant whereby purchasers of healthcare services (consumers, employers, etc.) are unaware of the cost and quality differences between providers of care and services rendered. Historically, providers and health insurance companies have not been forthcoming with cost and quality information, but this is changing and it has also created an opportunity for third-party organizations to fill the information gap.

Self-Interest

Self-Interest by its very nature is a “neutral” term, in that there is no good or bad associated with it. Self-interest can have a positive connotation as it relates to one taking care of themselves or family or it can be abused when it is used at the expense of others. 

Self-Interest is also the fuel that makes our market system work. The famous Scottish economist, Adam Smith, stated the following to explain the win-win aspect of self-interest:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” (“Wealth of Nations," Adam Smith)

A close reading of this simplistic concept shows how all parties (the butcher, the brewer and the baker) benefit (money in their pockets) as well as how we the consumer benefit (food or drink on our table) by achieving this mutual self-interest-based relationship.

Self-interest as it relates to payment methodologies is a hot topic in healthcare today. Our current fee-for-service payment methodologies foster a self-interest-driven, “the more you do the more you make,” healthcare environment which contributes to our high costs and inconsistent quality in healthcare. This is why most parties agree that we need to transition to a value-based payment methodology. By going in this direction providers of care will achieve their self-interest from a financial perspective by delivering value-based quality care to their patients. While transitioning to value-based payment methodologies might sound easy, it is not, for a number of key reasons. To-date, there has been more talk than action related to value-based payment methodologies, and again we will be deep diving this issue in future blogs.

Moral Hazard + Asymmetric Information + Self-Interest = High Healthcare Costs

Based upon your understanding of moral hazard, asymmetric information and self-interest as discussed above you can see how the combination of these three health economics realities translates to high healthcare costs. If someone else is paying the bill (moral hazard), you really do not care about the lack information (asymmetric information) about cost differences between providers of care and services rendered, which impacts the demand side of healthcare. When you combine this demand side reality with the supply side payment methodology of fee-for-service, “the more you do the more you make” (self-interest), you have not only high healthcare costs, but far less than optimum quality of care. You also do not have an environment that would foster any real competition between the providers of care, but that is changing, especially with the disruption that is occurring in the for-profit sector of healthcare.

Concluding thoughts

It is too simplistic to state that high healthcare costs are only caused by the combination of moral hazard, asymmetric information and self-interest-driven payment methodologies, but these health economics concepts are key contributors. Socio-economic/demographic factors such as poverty, lack of education, age, etc. also play a significant role in both our societal high healthcare costs as well as our poor outcomes. We will delve further into the issues relating to socio-economic/demographic factors and the importance of population health in future blogs.

Finally, it is also too simplistic to state that the “low” price is the “right” price in healthcare, but it is also too simplistic to state the “high” price is always the “right” price in healthcare. We again will be exploring these value differences in future blogs as well as new technologies and information that are becoming available to assist in the healthcare purchasing process.

Thomas Campanella is the director of the Health Care MBA and an associate professor of health economics at Baldwin Wallace University near Cleveland, Ohio.

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