Simply put: Provider-insurer information asymmetry

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.

Most of us have health insurance. So, when we visit the doctor or go to the hospital, our insurer (whether a private company or a public program) pays most of the bill. Most payments to health care providers are some variation of fee-for-service (FFS), which means that the provider decides what services you need, provides them, and the insurer pays a fee for each one provided.

How does the insurer know that it is paying for necessary care and that the care is of good quality? That is, what prevents the insurance company from getting ripped off? Actually, who decides what’s a rip off anyway? What is costly waste to an insurer could be considered necessary care to a provider and her patients.

Clearly the definitions of “waste,” “fraud,” and “abuse” vary. Still, the provider has far more information about what is really happening in the exam or operating room than does the insurer. From experience, the provider is also aware of how to get things paid by the insurer, how to bill for maximum reimbursement and minimum hassle. That information asymmetry can be used to the provider’s advantage. It may even advantage patients.

Yet, it does cost more. And the insurer doesn’t like it, nor do taxpayers in the case of public programs. (Likely each taxpayer and policyholder wishes to root out “waste,” “fraud,” and “abuse” except in the instances in which he or she benefits. My doctor is, properly, providing me only necessary care. Some of what yours does for you is wasting my money!)

Many proposals to reform payment systems are motivated by these notions. How do we minimize incentives to “over-provide” care while maintaining quality? How do we provide necessary care without paying for unnecessary stuff? How do we even define what is necessary and not?

The basic thrust of reforms that address these issues involve moving away from FFS payments. Instead of paying procedure-by-procedure, pay for an end-to-end episode of care with one bundled payment (i.e., all the care necessary for one acute episode, from diagnosis to rehabilitation). “Capitation” is paying one price for all the care for an individual for a period of time (like a year). Meanwhile, requiring providers to meet certain quality benchmarks to qualify for bonus payments maintains some incentive for quality. These ideas are not mutually exclusive and it’s an open question whether any of them can work.

Nevertheless, what they attempt to address are the consequences of provider-insurer information asymmetry. Providers know more. Insurers are paying the bills. It’s a recipe for higher costs, not through malevolence, but just by virtue of human nature. We all want to do the best job we can and get paid well for it. The natural consequence of doing just that in health care is higher costs.

Further Reading

Hyman, David A. “Health Care Fraud and Abuse: Market Change, Social Norms, and the Trust ‘Reposed in the Workmen’.” The Journal of Legal Studies. 30.2 (2001): 531-567. [I wrote about this paper, and some responses in prior posts.]

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