Information Problems

Asymmetric information is a topic discussed in introductory Economics courses that describes a situation where one party has more information than another. For example, if you are selling your car to a passerby on the street, you have more information about the car than the passerby does. You know that you took your car to your trusty mechanic every 4,000 miles for an oil change, and that whenever anything seemed remotely wrong with your car you got it checked out immediately. Perhaps you’re charging $ 8,000 for you 8 year old car. The passerby is thinking “that’s a pretty steep price for this car… it looks good, but how do I know if something isn’t wrong with it… there MUST be a reason (s)he’s getting rid of it”.

Alas—we have an information asymmetry.

There is no way the buyer can be certain of the quality of the car until they purchase it and drive it around for a few months. The seller can attempt to tell the buyer what a good car it is, but how can the buyer be sure they aren’t just getting scammed?

This story is applicable to the heath care industry as well. Let’s say you go to the doctor with a persistent sore throat and the doctor diagnoses you with some condition--something you can't even pronounce with confidence. “Oh no” you think to yourself, “that sounds serious". The doctor goes on to prescribe you an antibiotic and perhaps some other medicines that will make you more comfortable. The doctor is giving you directions on how to take your medications and what the side effects are, etc. You’re starting to feel a little out of the loop and you’re getting blown away by all of the foreign terminology and directions. At the end of the appointment the doctor asks “do you have any questions”? You think to yourself quietly for a moment… you’re not even sure you could come up with an educated question if you had to. Despite feeling overwhelmed you respond, “no”.

You’ve just been a victim of asymmetric information (and if this situation has never happened to you, surely you’ve taken your car to the shop before and have agreed to all sorts of repairs you weren’t really quite sure about). Doctors go through an intense amount of education—both in the books and in practice. We can’t expect for them to convey all of that knowledge to us when we visit their offices, but we really ought to be better consumers. You wouldn’t buy a new dishwasher without doing at least a little bit of research (at least you’ll compare Home Depot and Lowe’s). However, when you go to the doctor, often times you go in with very limited knowledge about prescription drugs or treatments your doctor may prescribe. If your doctor tells you that you need a test that will cost you (or your insurance company) $4000 at the hospital that you usually go to, are you going to call the other local hospitals to see if you can get the same test for less money? Maybe you think that the test will cost the same everywhere—surely these things have to be standardized—right?

Wrong. The variation in cost between hospitals can be astronomical. We’ll wait for another blog post before we discuss this in full—so for right now you’ll just have to believe me when I say that procedures don’t always cost the same at every hospital.

So, what is the problem here? The problem is simple—you don’t understand that product(s) you’re consuming, and you’re likely paying too much. The bigger problem is that, if you have health insurance, you (and your doctor) probably don’t care too much since you won’t be picking up the bill yourself. This results in overtreatment at increased costs. What’s worse is that, if you’re taking unnecessary medications (perhaps you get prescribed an antibiotic for a common cold) you may actually end up hurting yourself in the long run. I hypothesize, that if we were better, more informed, consumers of medicines we would save money, but more importantly we could be healthier. Every day people are harmed by drug interactions that could have been avoided. Doctors are people too—so they will make mistakes. The informed consumer can safeguard themselves from medical mistakes by asking questions and attempting to learn more about the medications and treatments their doctors prescribe.

What can you do? Next time you’re at the doctor try and think of questions to ask—even if they’re simple. Your doctor has a lot of knowledge—you just need to finagle it out of them.

Here are some questions to ask that I found on about.com:

1. What is the name of my medication?
2. What does my medication do?
3. How/ when should I take my medication?
4. How long should I take my medication for? (this is important—sometimes doctors are not inclined to remove you from medications, even when you may no longer need them)
5. What should I do if I feel better and I don’t want to finish my medication?
6. Does this medicine contain anything I’m allergic to—or will it react with any of my other medications and/or supplements or vitamins?
7. What food, drinks, or activities should I avoid when I take this medicine?
8. What are the side effects? Are they common?
9. Is there a generic version of this medicine?
10. Is it safe to use this medicine if I am pregnant or breastfeeding?
11. How soon will this medicine start working?
12. Will any tests be necessary while I’m taking this medication?
13. Most importantly (arguably): What risks are associated with this medicine and do they outweigh the benefits?

Patents

I am no legal expert, but today I thought I would examine another one of the reasons why medical care is so expensive in the U.S.--the practice of "evergreening" patents in prescription drug. This is a tactic pharmaceutical companies use to extend the life of patents of money-making prescription drugs.

A patent on a prescription drug typically lasts 20 years. However, this can be extended for various reasons. Congress allowed for a 6-month extension of patents if the drug was one that needed to be tested in children. While child testing is important since children sometimes react differently to medicines than adults, this is a very costly provision. According to an article by Robert Weissman (called The evergreen patent system: pharmaceutical company tactics to extend patent protections (Patently Abusive)) It cost pharmaceuticals a bit less than $800 million to do these tests in children on selected drugs, but it resulted in an extra $30 billion dollars in sales. (That's right $800 million in costs, $30 billion (with a B) in extra revenue). I think there is something fishy about this situation. A patent lasts for 20 years-- why can't they do research on the affect of the drug on children in those 20 years? Why do they need an extra 6 months? Six months doesn't seem like much time to do substantial research--especially with medical testing where a lot of the testing revolves around affects from drugs on the body over time. It seems to me that enough research could be completed in 20 years, and that extending the amount of time to do research by 2.5% doesn't add much except excessive profits at the expense of those who are ill.

Again from Weissman:

Led by Public Citizen, consumer groups say the pediatric exclusivity has conferred a windfall on the drug companies. Public Citizen estimates AstraZeneca will earn more than $1.4 billion in added revenue for Prilosec, thanks to the pediatric exclusivity provision, with Pfizer also crossing the $1 billion threshold for Lipitor. Drugs such as Prozac, Celebrex, Zoloft, Claritin and Cipro will bring their makers more than $300 million in added revenue, due to the provision.

Another way pharmaceuticals can extend the life of a patent is by tweaking the ingredients in medications, or by claiming that the drug can actually cure or treat other conditions than originally advertised. For example, a depression medicine may be able to be re-billed as treating anxiety which will extend the life of the patent. Sometimes when a patent does expire, pharmaceuticals can again, tweak the ingredients, and then market the drug as a "new and improved" version of the drug. Since consumers don't know whether the new ingredients are really necessary or not, they may choose to take the new medicine (with the new patent), rather than staying on the old drug which has lost its patent protection.

I don't want to totally demonize pharmaceutical companies since they do a lot of good. I also firmly believe that we do need monetary rewards to help pharmaceuticals recoup the costs of research and development. We can't expect people to be extremely inventive if we're not willing to compensate them handsomely. However, the line needs to be drawn somewhere. The cost of prescription drugs is rising much faster than the value of our incomes and health benefits. At some point the cost will be more than we car bear, and we will have to either reform the way prescription drugs are priced, or we will have to do without prescription drugs; and for many people, the latter is not an option.

WSJ: Does a slower economy increase athleticism?

Slow Economy, Faster Marathons?

The Wall Street Journal online edition had an article that presented evidence of laid-off workers running faster road races. Overall, marathon times in the U.S. have gotten faster this year after slumping a bit in 2007 and 2008. The author suggests that this is because, during 2007-2008 people were trying to hold onto their jobs as the economy started to contract--which in turn meant that they sacrificed their early morning run for an even earlier arrival to the office. In 2009 when massive layoffs really started adding up more people had time to train for major athletic events, like marathons.

Is this a spurious relationship or not?

At first the economist in me said, this is probably just a fluke in the data. The evidence the author provides is really just aggregate level stuff that says marathon times have gotten faster this year. Then the author proceeds to say that this is because a lot of those unemployed people are actually competitive marathon runners... seems a little far-fetched. I could believe once people are laid off they take up running as a hobby--hence why marathon registration has increased, but I don't know about their times being significantly faster statistically. Wouldn't once ''regular Joe's'' have to be training a more than 6-9 months to get really, really fast? I would think so.

I can more easily believe the student athlete story that goes like this: Athletes who graduated recently are more likely to try and run competitively this year than in the past because they know that the job market is so unfavorable. The cost-benefit calculation has really changed for new grads. The cost of pursuing a hobby like competitive running is less costly because you're probably not giving up a salary at some high-paying job (however you are giving up health insurance, potentially). The benefit, is that you don't have to go through the pain of searching for a job during a recession, and you get to do what you love--run races (and potentially get paid for it)! I can see how this would skew the data towards faster times, if all of a sudden you have a huge pool of competitive runners being dumped into the marathon pool.

In the article, the author interviews a few recently laid off workers-turned competitive marathon runners. Their anecdotes fit his story about the evidence. I thought to myself, maybe this isn't completely spurious. I even thought about my own situation. This summer I'm taking enough summer classes to keep me busy, so I'm not working a part-time job like I usually would. I've always been a recreational runner-- but my pace has always been very, well, recreational--at around 10 minutes per mile for longer races. This summer I'm training for my third marathon this fall (which, first of all, may only be happening because I have enough time to train for it since I'm not working). I've been running a few fun runs around town--and strangely--my times are substantially lower than they usually are. I'm down to about 9:00 minutes per mile now for longer runs. I'm not sure if this is because I have all of a sudden developed some fast twitching muscle fibers, or if it's due to the fact that I have time to do quality runs. Last summer when I was taking 6 credit hours and working 40 hours a week, my running really suffered and I ended up missing out on the Fall marathons. Even when I would get out for a run in the morning it would be rushed--and if I waited until after work and school I was too exhausted to do anything but jog around the block a few times before crashing into bed. I think a lot of people probably have the same experiences-- it's tough to come home from work and find the energy to go outside for a speed workout on the track. However, when you're not working you have ample time to pursue your hobbies. So maybe the effect of laid-off workers on marathon times is really there-- at least a little bit.

Pay for Perfomance

I’ve had a businessweek article marked to read in my browser for days now, and finally tonight I got around to reading it. It discusses how President Obama spoke to the AMA (American Medical Association) and discussed some of the changes he believes should be made in the current health care system. Many of the changes would result in lower incomes for doctors—so the president was not exactly “preaching to the choir”. Doctors likely see the effects of high medical costs every day, but surely don’t want the cost reductions coming out of their paychecks.

A lot of health insurance policies in the United States are structured in a fee-for-service fashion. This means that as a doctor performs more services he/she receives more money. It’s not hard to see the effect this would have on the number of services provided by doctors. Obama noted that this fee-for-service changed the way medicine has been practiced—and it needs to change.

"It is a model that has taken the pursuit of medicine from a profession—a calling—to a business," said Obama. (taken from businessweek article)

This incentive structure provides another reason health care costs are higher in the United States than in other countries. How much higher--now that is a good question. According to the BusinessWeek article"it is doctor payments that consume one-third of the nation's $2.4 trillion in health-care spending." I think we would need to verify this with more data, but if it's even remotely true, this topic ought to be at the top of the list of necessary health care reforms.

There is no question regarding the power of incentives. Perhaps the solution here is to align incentives with both our financial and health goals, rather than having them compete. For example, what if doctors were paid bonuses when a patient quit smoking—I’m not aware of any policy like this currently in the U.S. Currently doctors get paid to advise people to stop smoking, and they treat the illnesses that occur because of smoking—cancer, emphysema—both very costly (physically, emotionally, and financially) illnesses. If we could persuade doctors to get patients to quit smoking with additional income, rather than just the happiness a doctor gets from getting a patient to quit, I think we would see a decrease in smokers, and eventually a decrease in diseases caused by smoking

Pay for performance. It’s not a new concept—but it is an effective one.

A good talk on Health Economics in the United States

Here is a link to the former CBO Director, Peter Orszag's blog. This post links to an interesting talk on the problems with Health Care costs in the U.S. as well as the slides from the talk. Currently Orszag is the Director for the Office of Management and Budget. He is the youngest member of the Obama cabinet.

This lecture describes some of the health care challenges the U.S. will face in terms of costs. Orszag discusses how medicare and medicaid costs are projected to grow rapidly in the future, and how costs vary geographically.. Run time is a little over 30 minutes.

The Economics of Health Care is one of the areas of Economics that I find most interesting not only because some type of reform is exigent, but also because everyone interfaces with the health care system at some point in their life.

Some may not agree that reform is necessary, and that the system works fine just the way it is. However, I would suggest they do a bit of research before drawing such a conclusion. According to the Economic Report for the President (2009 http://www.gpoaccess.gov/eop/2009/2009_erp.pdf see CH 7), Americans spend about $8000 per person on health care per year. This is expected to grow rapidly as technology advances.

The chart below illustrates approximations of spending as a percent of gross domestic product (GDP) in the U.S., Canada, Japan, and France. Canada, France, and Japan all have universal health insurance—which one would think would be more expensive. As you can see, the U.S. spends the most as a percent of GDP, in 2000 it was around 13%-- now it is closer to 15% I believe.

Some would stop here and say—“okay—yes we spend more than other countries on health care, but we have the best health care in the world, so the extra expense is worth it.” Sadly, as with everything else in life, more is not always better. Our life expectancy is lower than the other countries in the above chart and out infant mortality rate is higher—two leading indicators of aggregate health status. So now it looks like we’re spending more, but not getting more—which, anyone can tell you—that’s not a good thing.

(This thought also assumes that you have health insurance as a means to battle health costs, which is not true for about 16% of Americans. More on this at a later date…) Economists call this phenomena diminishing returns—meaning that with each additional dollar invested in health care, at some point less health is received. It’s really best to illustrate this one with a handy graph. Part of the health care debate is really between the two (poorly drawn) icons below.

The question is: Are we on the star or the circle?

If we’re on the star, this means that as we spend more on health care we get a positive increase in our health status—a good thing! If we’re on the circle it means that as we spend more money on health care we don’t get an additional health from that spending (like trying to ride your bike to the grocery store, except your bike happens to be a stationary bike). Worse, if we’re at a point beyond the circle it means that as we spend more money on health care our health status actually gets worse—yikes.

Obviously we know there are big gains to some basic health care spending—immunizations, annual exams like paps, breast exams, prostate, etc. However, are there the same gains when a patient undergoes every MRI, X-Ray, and other expensive test necessary in the name of “just in case”? This is where people get divided because the answer to that question usually depends on whether or not anything useful results from the battery of tests. It probably isn’t worth it to give someone an MRI for a stress headache, but it is certainly worthwhile to give someone an MRI for a headache that is caused by a brain tumor.

This brings us to our first point of discussion in this series of things that contribute to the high cost of health care in the United States: Defensive Medicine.

Doctors are supposed to only run tests that they believe are likely to produce useful results. However, doctors often practice what is known as defensive medicine to protect themselves from expensive lawsuits. The JAMA noted that 90% of doctors say they have practiced defensive medicine—and who would blame them given the costs of a malpractice case—both financial costs, but also costs to his/her reputation.

Clearly defensive medicine raises medical costs as patients are subjected to more tests than are necessary. This is costly not only due to the money it costs patients, but takes time away from work/family, adds stress to the life of the patient undergoing the test, and adds to the crowding of hospitals with test equipment.

Sometimes the tests themselves can be lead to health problems for patients. More on all of this at KevinMD—a physician’s blog: http://www.kevinmd.com/blog/2007/04/defensive-medicine.html

What are some solutions to this? How do other countries get around the costs of defensive medicine? This is perhaps a topic for a future post, but what are your thoughts?

Thoughts on Globalization

I’m currently reading The Travels of a T-Shirt in the Global Economy by Dr. Pietra Rivoli. I’m about half-way through and the author just discussed her trip to Shanghai and her visits to various mills where cotton thread and fabric are produced. Growing up I remember the scandal with the sub-par conditions in mills that got tied to Nike and the public outrage that ensued. Everyone is familiar with the stories of mills outside U.S. borders where OSHA and minimum wage laws aren’t present. Men, women, and children work 12-14 hour days for cents on the hour in unsanitary conditions. By our standards it’s disgraceful.

The book quotes a young woman working in one of the mills and, surprisingly she says “it’s not that bad” and “it beats the hell out of life on the farm”.

In a lot of my classes, and surely at dinner tables around the world, the topic of third world factory life comes up. The conversation usually includes descriptions (not first-hand, of course) of how hard third world factory life is. We hear about 12 year old boys working 12 hour days with only 1 meal break, and being paid only 10 cents at the end of the day. The obvious conclusion is always “we need to shut down those factories—they’re not humane!”

I wouldn’t argue that we should allow children to work such hours without breaks, but I also would not argue that we take their job away from them. It’s all a matter of perspective. It would be unheard of for a 12 year old boy to work that type of job in America. A 12 year old boy here should be in school during the day and going to baseball practice after school—not working to support his family at the factory. However, in many other countries, there isn’t mandatory schooling (or even the option of public schooling), so when the opportunity to work to support your family arises, the best choice may be to take it—besides, what’s the alternative? Being able to work gives people a bit of autonomy and the ability to not only help their families—but they can help themselves. In the book, one girl leaves her family farm to work in a cotton factory so that she can gain some freedom. Despite the sub-par conditions of the mill, she is able to earn a steady income every month and purchase things that she wants like a variety of food, clothes, movie tickets, etc. She was even able to pay back her family for the money they gave to her (arranged marriage) husband so that he would agree to wed her. Now she gets to date who she wants, and she can even afford to spend a night on the town with the girls—which she could not do when she worked on the farm. Even though the factory life, by Western standards, is unacceptable it was able to give this woman, and many others, autonomy she had never dreamed of. Had someone gone in to shutdown her factory in the name of humanity, she would have lost her job and likely would have had to go back to the farm where there was no autonomy, and less (if any) pay. What I’m saying is—although the factory isn’t great, the alternatives are worse.

Next time this factory life conversation comes up I think it would be smart to remember that we need to examine the situation from the perspective of the person who is in the factory—not from our own. We ought to take into account cultural norms, as well as what alternatives for income exist for people in factories. Obviously some situations are not acceptable—there are child labor laws, etc. But I think we need to not be so quick to criticize the hardships that people are willing to endure to gain a little freedom.

What do you think?

GDP Tanks

While walking out of a delicious local lunch spot this afternoon I was shocked to find this headline on USA Today: "GDP down 3.8% in Q4, biggest drop since '82". I grabbed the newspaper stand and yelled "what?!"

I know there is a recession going on. I know that unemployment is at 7.2% (and is probably much higher when you account for the discouraged worker population). I know last quarter had negative GDP growth-- but it wasn't even down by a full percent. I admit, I've been on vacation from school and enjoyed a very relaxing winter break without newspapers, so I'm out of the loop--but this just seemed crazy. I paused for a second and it really hit me-- this is... bad.

It's funny what it takes to make you realize that times are really tough. A day barely goes by now where you don't hear about somebody's cousin, dad, sister, or whomever has been laid off. There are record numbers of people signing up to receive unemployment benefits. "About 588,000 workers applied for jobless benefits last week, up 3,000 from the prior week and 61% higher than a year ago..." It appears we all might need a bailout.

The media loves to blow things out of proportion. If you check out the stats a little bit, you'll find that our current situation isn't that close to the situation in 1982. As you will find in this very useful graph, the quarter USA Today referred to in 1982 had -6.2% GDP growth. That's quite a bit different than -3.8%. Clearly -3.8 is no picnic, but it's not exactly the Great Depression either.

You've really got to wonder when this is all going to end. It's like a bad dream you can't wake up from. I've heard mixed reports about the housing market-- MSNBC says local markets are stabilizing, while Business Week is still forecasting doom for housing in 2009 with a turnaround coming in 2010. The housing market is part of what got us into this mess in the first place, and I think a lot of people are looking to it to get us out of it. However, I'm afraid it's going to take a lot more than the bottoming out of housing prices. People need to be able to not live in fear of losing their job at any moment. Credit needs to become available not only for individuals, but also for businesses. We need to stave off deflation, as that would make this situation downright dismal. We've got a lot on our plate.

In some sense, I feel like the current economic situation isn't worth worrying about because there is nothing that any one normal person can really do about it. Make lemonade-- as my boyfriend Chris always says when I get stuck in a less than desirable situation. This could be a good time to stop and savor what is really good in life-- family, friends, laughter, etc. Even on your worst day, there is always something to thankful for.