• Credence good

    This is a TIE-U post associated with Jonathan Kolstad’s The Economics of Health Care and Policy (Penn’s HCMG 903-001, Spring 2012). For other posts in this series, see the course intro.

    The second sentence of Richard Frank’s Behavioral Economics and Health Economics [1] (an ungated pdf is available) provided the motivation for this post.

    Consider a set of economic activities where addictions figure prominently; where consumers have limited information that they must use to make choices in the context of fear, urgency and trust in an expert; and where the services used are often credence goods (Emons, 1997 []) whose applications are frequently governed by professional norms and habit. [Bold added.]

    Not knowing what a “credence good” was, I looked up Emons (1997) (ungated pdf available).

    With a credence good, consumers are never sure about the extent of the good they actually need. Therefore, sellers act as experts determining the customers’ requirements. This information asymmetry between buyers and sellers obviously creates strong incentives for sellers to cheat on services.

    Wikipedia says,

    A credence good is a term used in economics for a good whose utility impact is difficult or impossible for the consumer to ascertain. In contrast to experience goods, the utility gain or loss of credence goods is difficult to measure after consumption as well. The seller of the good knows the utility impact of the good, creating a situation of asymmetric information.

    Another term for “credence good” is “post-experience good,” but that is not very helpful. An experience good is one for which “product characteristics such as quality or price are difficult to observe in advance, but these characteristics can be ascertained upon consumption.” And, for completeness, a search good is one with “product or service with features and characteristics easily evaluated before purchase.”

    All other things being equal, one would expect more price competition (greater price elasticity) for a search good than an experience good and for an experience good than a credence good. Fundamentally, the less it costs to obtain information about a good the more sensitive consumers should be to price. If you know what you’re buying, you can tell if the price is worth it. If you don’t know what you’re buying, it’s easy to overpay. Buyer’s remorse would be least common with a search good.

    From the title, Frank’s paper is obviously about ways in which behavioral economics can address some of the limitations of standard economic models as they are applied to health care. If you know even a little bit about behavioral economics you know that it’s concerned with marrying economics with observed psychological heuristics humans tend to use in decision making. In other words, the fully informed, perfectly rational decision maker steps aside, at least somewhat.

    Well, if there is one domain in which people are clearly not always fully informed or perfectly rational it’s health care. Even in good health it’d be hard to meet anything close to that standard. In poor health, forget it. So, we often rely on heuristics. For example, we judge a doctor not based on objective quality measures but based on our gut feeling about him or her or based on what our friends say. Quoting Frank,

    Consumers of health care have been shown to be good reporters of certain attributes of care and weakly aware of others. For example, patients have been shown to accurately report information on whether a physician was respectful, attentive, clear in explaining clinical issues and operated a clean and efficient office. These same patients were found to be inaccurate in reporting of the technical quality of care. That is, they were not accurate in judging whether a physician supplied appropriate evidence based treatment []. It has also been shown that the dimensions of care that consumers understand and can accurately report are not highly correlated with so-called technical aspects of quality care []. The implication here is that patients will commonly develop a prior about a primary care physician by relying on reports from family and friends that will be based on observations about some dimensions of medical care and perhaps not on the dimensions that most directly affect their health outcomes. […]

    Note that the above is true even when quality metrics about physicians are available. People tend not to pay attention to or trust them.

    Another observation from the literature, reviewed by Frank, is that more choice does not result in better decisions. The reason is that people can only process so much information. As the volume of it increases, they rely on simpler heuristics to cut down the decision space. Just as in the problem of choosing a physician, the heuristics for other choices — like health plan — are not always highly correlated with good indicators of quality.

    Obviously this problem is amplified in the case of a credence good. Heuristics can’t be expected to be correlated with quality in that case. In fact, the correlation should be random. If you can’t tell much about what you’re buying in advance your heuristics may be comforting, they may be related to how our brains evolved, they may serve sensible social purposes, but they don’t help you make a good decision.

    The policy implications stemming from the application of behavioral economics in analyzing health care markets are potentially profound. Two cornerstones of recent U.S. health policy are: 1) the presumption that increasing the availability of information to consumers will result in improved quality of care, and 2) that more choice of health plans and providers will inevitably make consumers better off. Examining the basic laboratory and psychological research used in behavioral economics immediately raises challenges to these policy fundamentals. [Bold added.]

    More is not necessarily better, not in health care and not in health plans. The intuition that consumer information and more competition always* improve decision making and drive down costs just doesn’t seem to apply, not just for behavioral economics reasons but for others like market power considerations and the supply sensitivity of care. I wouldn’t say this is “potentially profound.” It’s just profound.

    * NB: It’s possible (likely even) that more can be better in cases where there are few choices, but there is a limit. You probably want some choice, some competition, but not too much. That’s why more isn’t always better.


    [1] Frank, Richard. “Behavioral Economics and Health Economics.” 2004, NBER Working Paper #10881.


    • “Well, if there is one domain in which people are clearly not always fully informed or perfectly rational it’s health care. Even in good health it’d be hard to meet anything close to that standard. In poor health, forget it. So, we often rely on heuristics. For example, we judge a doctor not based on objective quality measures but based on our gut feeling about him or her or based on what our friends say”

      -There is *no* market in which people transacting are fully informed or perfectly rational. None. I find it curious that the market for health services is singled out as a market that fails to satisfy the formal requirements for perfect markets when A) no real market ever has, or will satisfy these requirements and B) there are many other markets where the information assymetries are just as profound. Legal services, financial services – you name it. Not to mention all of the markets where the presumption that there are objective benchmarks with which to measure the rationality of preferences would be transparently absurd.

      Real people evaluate medical providers and treatments on many dimensions that are rationally defensible even if they’re at odds with a rationality that’s defined only in terms of clinical efficacy. Were that not the case – modalities like homeopathy that can only offer a placebo effect wouldn’t exist. People care about convenience, discomfort, amenities, ambiance, attitude, etc, Once you expand the definition of rationality to “things that real humans care about when obtaining medical care” it’s far less clear that they’re doing a terrible job of “maximizing utlity,” much less that they’d be better off if external agents constrained their decisions to optimize clinical efficacy.

      • Is degree of market failure measurable? If so, has anyone shown one market “more failed” than another? That would be interesting. If not, we’re left to speculate. In that case, I assert that health care is “more failed” than many other markets, not just practically, but by its very nature. Again, if that can be beaten down by data, let’s have it. If not, we can agree to disagree.

        • Austin,

          I promise to do some googling and look for specifics…

          But my experience in marketing research would lead me to believe that bad decisions – another way of defining market failure – are correlated with the emotional context of the decisions.

          Things like surgery – chemo – radiation – are pretty intense – but so are the pressures that come from relatives and friends to do “everything” to fight the disease. Not to mention the fear of dying distorting our ability to think logically or rationally.

      • “-There is *no* market in which people transacting are fully informed or perfectly rational. None.”

        No market is perfect. However, many commodities can be returned. Not your CABG bypass graft. You may not know everything about your car, but you can return it. You can spend extra time researching it. You dont have that luxury with your chemo. Legal services? You can hire a new lawyer or appeal your case. Once you send your three y/o off for that tonsillectomy, bad care may be irrevocable. Financial services? We have had at least 5 advisers. If the Pulmonary doc had misdiagnosed my brother’s PE, he would be dead. How often are you told you are likely to die, now choose your car (or name your service or other commodity) in the next 24 hours. You can drive somewhere to get another service or order stuff online. An awful lot of Americans live close to just one medical facility.

        So many medical decisions are time limited, there is no way to reverse them, they are made under severe time limits and under emotional duress. There are real geographical limitations.

        If it were legal, I wish I could just videotape every mother who hands off her baby as I take them to the OR. Or spend time today as I did with a family trying to decide if they let their beloved father die, or go for the heroic operation. One that might kill him, but alleviate the awful pain he is in. Watching these people in tears, then comparing them with people buying broccoli, or a car or picking a financial adviser. Not even close.


    • If market failure is defined as something like “when markets fail to implement all the gains that can be achieved through trade,” then *every* market will fail by definition when only the person defining what constitutes a “gain” decides not to measure all of what market participants value in a given exchange.

      Any model that defines market performance in terms of measured cost-adjusted clinical efficacy and nothing else is going to generate “market failure” every time, for the simple reason that actual humans can and do have a variety of values and preferences that cause them to value other outputs that doctors and hospitals provide. The fact that minimizing anxiety, pain, suffering, disfigurement, etc, etc, etc are real clinical outputs that are rarely if ever measured when tabulating market performance only complicates the question further.

      Those (this includes very well intentioned, humane, and learned persons) who want a pretext to intervene in a given market will always be able to define market performance such that the market in question “fails”and requires external intervention. The reason why there is more empirical data on the health-care market isn’t because it’s exceptionally imperfect, its because it’s the object of an exceptionally high level of scrutiny.