“Simply put” is an ongoing series. See the introduction for an explanation of the series and the full list of topics that have been or may be covered. Feel free to suggest other topics in that post.
Why do you buy something? Fundamentally there’s only one reason: at the time of purchase, the benefit (enjoyment, satisfaction, happiness) you expect to obtain from the thing is greater than the value of the money you spend to buy it. If that were not the case you’d keep the money or do something else with it.
Look in your refrigerator. It’s full of food that you or someone in your household purchased. Why? Someone thought it was a good use of money, that the food was expected to be worth more than the dollars and cents used to purchase it. It’s not crazy. We need food to live. Without life, what good is money?
You can play this game with anything, even health care. Health is important to life too, to a good one anyway. That’s why most people think it is more important than money, at least to a point. We’re generally happy to trade some money for better health. Only with health care, there are few twists.
Who pays for your health care? Who benefits from your use of it at the time of purchase? Whose expectations of its value are greater than whose dollars being spent? Let’s take these issues slowly. In fact, let’s simplify the world and only examine a small piece of this great morass.
Imagine there is no such thing as insurance. Once upon a time that was the case in health care. People saw doctors and paid as they could with their own money. Sounds idyllic to some, but there’s a fundamental problem. How do you form an expectation of the benefits from your visit to the doctor? That is, how do you value the health care received? Keep in mind, you may not feel any better when you walk out of the office. But the doctor is telling you, has convinced you, that if you do as he says your life will improve. What’s that worth at the time of transaction?
Learning you’ll be better off sounds great! You would welcome such news from an expert, especially if you’re sick and wish not to be. You’d buy the service if you could. The doctor gets your money, you get his wisdom and his plan for your future better life. Maybe you even get some organ removed or tinkered with. It doesn’t feel very good and won’t for some time, if ever. What have you bought?
At the time of purchase, you’ve bought the same thing you buy whenever you buy anything: the expectation of greater value than the money you spent. Do you know you’ll actually be better off? No. Does your doctor? He sure thinks you will be, or thinks the chances are worth the money (your money). Well, he’s got a better shot of potentially knowing since it’s his area of expertise. At least for some things, he does know more about your health than you do. You already believe that because that’s why you went to him.
(It’d be handy to rely on experience, which works for buying other goods like cameras or cereal. But one health service is not like another. They vary by doctor, technique, patient, and time. Without a lot of help, one can learn a little, but not a lot, about what might be good value. It’s also hard to shop when you’re unconscious or in great pain or frightened. Hey, I feel the same way about getting my car serviced, though I try to stay conscious and the pain is only to my wallet.)
So, it’s reasonable to believe that your doctor–like your auto mechanic– knows more than you for the thing you see him for. Yet it’s your money and your body. He genuinely thinks he can help you. He genuinely wants to help you. You walked into his office for just that. And he wants to get paid. He should be.
I don’t know about you, but I have a high regard for many of the doctors I’ve seen in my life. I think they help me. Still, it’s their word and my money (or would be if I were not insured). It’s not an equal bargaining position. They know more. They have an incentive to do more–to help me, yes–and my money is on the line, as is my health. I think the incentives to pay more, to get more, are obvious. They’re not the only thing driving the utilization and cost of health care ever higher, but they are a factor.
This is information asymmetry at work. The doctor has the information. I put my trust in his wisdom and my money in his pocket. It’s just a fact of health care. This fact, that the doctor knows more than you, doesn’t change if you put an insurer (public or private) in the middle. Doing so does layer on some additional problems, and potential benefits. I’ll get to some of those in future “Simply put” posts.
Further Reading
Arrow K. Uncertainty and the Welfare Economics of Medical Care. (1963, American Economic Review).
Reinhardt U. Healthcare, Uncertainty and Morality. (13 August 2010, New York Times).
