Health insurance companies don’t know about us, but we don’t know about healthcare markets
During our class discussion of asymmetric information and market for lemons, we talked about healthcare insurers and healthcare recipients, in which recipients have more information about their own health risks, and therefore have an advantage when purchasing health insurance. If the price is more than what they think it’s worth, they won’t pay for health insurance. The adverse selection (people who benefit most from health insurance seeking it out) could cause part of the market to collapse, since healthy populations would value health insurance prices less than its cost. In this case, there is no equilibrium of everyone in the population getting insured as only high risk people would buy health insurance because they value it more.
Private health insurance companies are aware that higher risk patients are willing to pay more, and “screen customers to eliminate high medical users, establish coverage limits and increase premiums to cover perceived financial risk” (3). Under current law, health insurance companies cannot refuse to cover or increase charges because of pre-existing conditions (2). This drives the overall premium price up. In an ideal world, healthy and non-healthy people are paying an equilibrium price that is between what buyers (both health and non-healthy) are willing to pay and what is worth to health insurers to sell at. However, high premiums often skew the health insurance market, and many healthy customers exit. This information asymmetry contributes to high absolute and administrative costs in the U.S. health system, as well as a large uninsured population and the inability of many Americans who need healthcare to afford it.
We did not discuss another aspect of information asymmetry that is very prevalent in the health insurance market once patients enter the system, in which “healthcare providers know much more about diseases and treatments than patients.” This Forbes article discusses the many ways in which healthcare systems lack transparency, and the benefits that stakeholders get from this information asymmetry. Firstly, true prices for medical services and technologies are considered “trade secrets” that stakeholders claim provide “a certain competitive advantage” and should remain confidential (1). One of these stakeholders are pharmacy benefit managers (PBMs), or companies that manage prescription drug benefits on behalf of health insurers. Their co-pay accumulator programs prevent manufacturer co-payment assistance contributions from going towards a beneficiary’s deductible and maximum out-of-pocket spending limits. Since patients have little to no information regarding pricing and positioning of products, they can do little to resist the increase of out-of-pocket expenditures. Unfortunately, for some, higher out-of-pocket costs mean poorer adherence to treatment. Patient out-of-pocket healthcare spending has increased from $338 to $425 billion from 2015 to 2020.
In the market for lemons of healthcare, the cost to providers is not known to buyers, whose values of healthcare probably change depending on the stage of life they’re in. Likewise, buyer values are not known to health insurers, as only buyers know their own health risks. However, it’s not as simple as only non-healthy people buying healthcare, as the current times we are in illustrate how important having access to healthcare really is, unhealthy or not. Sadly, the lack of transparency on healthcare providers side makes it difficult for patients to have confidence in the care they’re getting. Other ways information asymmetry causes lemon outcomes in the healthcare market are doctors ordering treatments or tests that are unnecessary, or the opposite outcome where doctors fail to provide necessary care, and uninformed patients demanding unnecessary treatments (3). This information asymmetry has many great impacts in the real world, as distrust in healthcare providers is growing because of a lack of transparency. Hopefully, more policies can be made that will serve patients’ interests and make the relevant information more symmetrical and available.
As a college student, I am fortunate enough to still be under my father’s employer’s healthcare plan. However, as a Cornell student, I am required to have a specific healthcare provider, one with offices in the Ithaca area, and since I don’t, I still have to pay $3000 a semester for the Cornell Student Health Plan (SHP). Given that I haven’t been to Cornell Health during my three semesters on campus, and am not in a high risk group, I think Cornell Health has a greater advantage knowing this about the majority of patients they cover. While the SHP requirement is in place for the health safety of students, most of Cornell students are young, healthy, and in low risk groups. The value of Cornell’s SHP to these students (myself included) is probably less than its cost, but since it’s required by Cornell, we still have to pay it. This fulfills the asymmetric information equilibrium we learned in class, that if all participants agree that some mix of goods will be sold, that mix of goods will be sold. As students of this institution, we agree to this exchange even if it has little to no benefit to us.
https://www.hhs.gov/healthcare/about-the-aca/pre-existing-conditions/index.html (2)
https://www.4sighthealth.com/when-healthcare-is-a-lemon-asymmetric-information-and-market-failure/ (3)