When The Healthcare Market Gives You Lemons
United States healthcare is bursting at the seams — with runaway costs, over-burdened providers and health systems struggling to remain solvent. Yet, an articulate diagnosis of such market shortcomings has largely evaded healthcare professionals due to the absence of an accurate economic lens, a lens which suggests that most inefficient markets flounder through widespread information failure.
Put simply, there is information asymmetry that occurs when one party knows more than the other in a transaction. In US healthcare, these micro-failures fuel macro-inefficiencies that hurt patients, wear out doctors, plague nurses, and frustrate executives. Information asymmetry presents “lemons” via four types of market failures, each of which are readily found throughout US healthcare.
🍋 Moral Hazard
Definition: Tendency of a seller who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior
Problem(s): Healthcare providers and payors employ first-party price discrimination across all buyer/seller relationships powered by the obfuscation of prices and intentionally misleading discount rates, often within increasingly monopolistic environments — ultimately hurting patients with higher prices that are further inflated by the supporting administrative costs.
Attempted Solution(s): Washington has made some progress with the Price Transparency Act and No Surprises Act in the last year, however, legislative mechanisms aimed at market correction have traditionally been riddled with loopholes, low compliance rates and administrative cost inflation — early indicators show these two pieces of legislation are consistent with this trend.
🍋 Supplier Induced Demand
Definition: When a seller uses superior information to encourage a buyer to demand more of a good or service.
Problem(s): Providers can manipulate patient demand for medical services to increase the use. This is particularly bad in US healthcare’s fee-for-service model, which lends itself to unnecessary visits, extra charges and an incentive for sick care over health care.
Attempted Solution(s): Value-based care models were embraced to tackle this issue, however, they have struggled to attain the network effects promised fueled by a lack of adoption and an onslaught of adaptations that undermined the core economic equation, to the benefit of the health plan entity.
🍋 Adverse Selection
Definition: When a seller knows more about their situation than the buyer does, leading to the buyer having an aversion to doing business with the seller.
Problem(s): Patients avoid care in the face of misleading pricing schemes of both systems and payors. Furthermore, adverse selection appears in patient record data gaps caused by a lack of incentive to share meaningful patient data with competing health systems and EMRs — to the direct detriment of patient wellbeing.
Attempted Solution(s): HIEs and interoperability efforts have made great strides at closing this market information failure, however, they have yet to circumnavigate the underlying competitive landscape, thus limiting the widespread transfer of meaningful, often life-saving, patient data.
🍋 Monopoly of Knowledge
Definition: Only a select few individuals are presented with the necessary information to understand a situation and make effective decisions.
Problem(s): Vertical integration mergers by the likes of UnitedHealth, CVS and Cigna have combined health insurers, providers, pharmacy benefit managers and other healthcare sectors. The resulting price controls over critical drugs and essential care is a textbook case of a knowledge monopoly. One only has to look as far as UHG’s 2022 revenue in juxtaposition to 2022 provider revenues to realize that the vertical integration virus is more deadly to healthcare than COVID-19.
Attempted Solution(s): Anti-trust efforts have been ongoing, but legislators have been fighting a losing battle in the face of the creeping growth of such behemoths. Beyond action on the hill, providers and health systems have been out-gunned, out-smarted and out-matched by the likes of this oligopoly.
Any entity within the US health ecosystem has the opportunity to take advantage, either justly or unjustly, of the market opportunities presented by information asymmetry. Yes! There are ways forward that can improve one’s market position AND significantly improve the lives of their patients.
These prudent actions may be strategic, legislative or analytic — nevertheless, any progress will require an intelligent increase in visibility across the care continuum, a systematic measurement of the impact of intervention, and policy informed by a micro-economic lens.
Inefficient markets will give you lemons, it is up to each healthcare entity as to whether they will make lemonade or continue to squirt one another in the eye and charge for it later.
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