Arrow & Information Assymetry


July 2013

A classic opportunity to test causality:

In 1963 when Kenneth Arrow wrote his seminal piece on ‘Uncertainty &Welfare Economics of Medical Care’, it not just stirred the scholarly debate on the economics of health care but it continues to form the basis of health economics theory even in today’s health economics class.

But is this now changing?  Arrow’s theory was based on the premise of asymmetric information between the consumers of health care and suppliers — in this case the physicians and health care providers — due to which the physicians will always have an advantage on pricing as consumer cannot completely know as much about their own health needs as would a doctor.

 However, with the increasing information on cost and quality being made available to consumers by the Center for Medicare & Medicaid seems to be bridging this asymmetry of information. In May 2013 the Centre released data for the first time on variation in hospital prices based on top 50 diagnosis-related groups. Thus consumers, policy makers, and employers can compare not only what a hospital charges them for a specific disease  but also can compare it to benchmark average at a state and national level.  Further, the Agency for Health Care Research and Quality along with other departments of Health & Human Services launched various initiatives to produce standardized measures on the quality front. The data on health quality outcomes and indicators of hospitals is becoming increasingly refined over the years as more standardized measures are being produced to compare hospitals, and increasingly more tools are being developed on this front. These are a mix of process and outcome indicators such as hospital associated infections acquired by patient, readmission rates, reduction in hospital readmission rates, various hospital care process measures, how well each provider compares at state and national level among several other metrics.

While health outcomes are a function of medical care inputs as well as socio-economic factors such as education, life style among others, a fact acknowledged not just by Arrow but also based on scientific evidence, the growing information brings a boon for consumers as well as researchers.

From a consumer perspective there is now more information to correlate cost and quality.  But it is even more interesting from a researcher’s perspective and those studying economics of health care.

The key question lies:

-How are hospitals responding to this increased pressure on publishing cost and quality data?

-How is this changing incentive structure changing the processes and quality measures?

-Is it changing the outcomes?

-How does this increased transparency in hospital data reduce the asymmetry of information?

-And what does it bring for the consumers?

This is a historic time for members in the research community – a classic opportunity for a pre &a post design or a comparative change design of two group equivalents.

The taste of pudding lies in eating, so lies the taste of any high quality research in building evidence. The time is ripe now.