Transparency and the invisible hand in hospital and healthcare costs

All opinions are my own and do not necessarily reflect those of Novo Nordisk

One of the things that sometimes seems to get lost when people talk about the power of the market to create efficiency is that a free market requires that information be shared and freely available and understandable by everyone.  When information is withheld by one side or the other of a transaction, or when different customers for a service or product are unable to compare prices, the metaphor of the invisible hand breaks down.

You can see, this, interestingly enough, in sports as it relates to both the trading of players under contract and the signing of free agents.  Since I’m a baseball fan, let me link here to a discussion of research that’s been done looking at Major League Baseball.  The studies looked at players traded or signed by a different team as a free agent and how those players performed in subsequent years versus players whose original team re-signed them.  It turns out that players who switched teams did, indeed, perform more poorly relative to projections than players who stayed.  This suggests that the original teams have proprietary information that allows them to make better decisions about which players to retain.  Thus the market for baseball players isn’t quite free and efficient because of information asymmetry.

And unfortunately, information asymmetry is also rampant in other industries such as healthcare. Continue reading