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.