The Red Herring of Asymmetric Information

Posted by Nicola Marter on Januay 5, 2017

In the 1960s, a Nobel Prize-winning economist by the name of Kenneth Arrow wrote an article about the problem of information asymmetry in medical care (i.e. the doctor knows more than the patient). The implication was that a free market could not be trusted to act efficiently in medical care and thus a regulated and institutionalized system must be in place to achieve universally desirable results. This concept has since been seized upon by many opponents of a free market approach to healthcare solutions who use Mr. Arrow's work to bolster their agenda of single-payer reform.

There is indeed an asymmetry of information in medical care. That much is indisputable. There is also an asymmetry of information in law, auto repair, computer technology, and countless other rhelms where we yield to the wisdom of those we consider experts. This does not necessarily preclude positive results however and, in fact, a relatively new phenomenon is demonstrating that, given competition and consumer freedom, it can encourage it.

People may not understand the intricate details of a coronary bypass, or where and when an MRI is really appropriate, just like they may not fully understand why they might need a new carborator or muffler. What they do recognize however is quality and value.

Medical tourism is about as laissez faire as it can get, and the practice is growing more and more popular. Patients the world over, dissatistfied with either the cost, the wait, or the quality of health services in their own country, are looking abroad for solutions. In fact, healthcare economist Uwe Reinhardt has said that medical tourism "has the potential of doing to the U.S. health system what the Japanese auto industry did to American carmakers."

More than half a million Americans will leave the country this year to receive medical services in countries such as India, Thailand, Singapore and various Latin American nations. These patients will have based their decisions on copious information about price, quality, outcomes and virtually all other pertinent information that is more often than not unavailable to them at home. Generally, the service will be part of a package deal that can include such additional services as air and ground transportation, travel visas, hotel accomodations and transfer of medical records to treating physicians.

The kicker? These package deals can cost up to one-fifth less than a similar procedure in the United States.

The reason? Because almost all medical tourists are paying their own way, providers must compete based on price and quality, as opposed to the United States, and most socialized countries, where they don't really compete on anything. That, and most foreign providers are free of the burdensome regulations in place for U.S. hospitals and providers, but that is for another day.

The phenomenon of medical outsourcing is not unique to the U.S. either, not by a long shot. In Canada, a nation which prides itself on free healthcare for all, more than 15 medical tourism companies are operating daily, arranging necessary health services for their clients. This list doesn't even include the numerous, more traditional, travel agencies that are beginning to advertise medical tourism packages. America is even on the list of destination countries, with one Cleveland hospital boasted as "Canada's hip-replacement center."

Circumstances are very much similar in Great Britain, another nation where healthcare is supposed to be free and universal. This year, more than 70,000 patients will depart the U.K. to receive needed health care.

Furthermore, the quality of these services is, by and large, on par with that received at home. In many cases, foreign doctors are board certified in the United States or various European countries, and more than 140 hospitals abroad are accredited by the Joint Commission International (one of the organizations that accredits American hospitals participating in the Medicare program), and that number is expected to double.

No one can be an expert in everything, or even most things. We rely on lawyers for our legal troubles, nerds for our computer problems, and doctors for our health. While we may not understand the complexity of these fields, nearly everyone can spot a good deal when they see one, and can make a value judgement based on the information that is available to them.

This is the great strength of medical tourism: it provides patients with the information that is far-too-often denied them at home, and they make decisions accordingly.

Given competition and the freedom to choose, information asymmetry need not undermine the functioning of the market, as self-interested individuals will find a way around that dilema. If medical tourism, products such as health savings accounts, and choice in general are permitted to expand, we can expect the market to continually adapt to the needs of free consumers.