Failures of Information in Health Care Marketing

Minette E. Drumwright, Harvard Business School
Nancy M. Kane, Harvard School of Public Health
ABSTRACT - The deluge of information concerning hospital care appears to have failed to prompt the positive market reforms promised by economic theory. The positive market reforms hinge on at least some purchasers making informed purchase decisions, which occur when purchasers have the motivation to acquire information, the ability to interpret it, and the incentive to use it. The three potential users of information to make hospital purchase or consumption decisions are the ultimate consumer, the professional purchaser (i.e., the insurer), and the group purchaser (i.e., the company). When the likelihood of each purchaser to make informed decisions concerning hospital care is examined, the group purchaser appears most promising.
[ to cite ]:
Minette E. Drumwright and Nancy M. Kane (1988) ,"Failures of Information in Health Care Marketing", in NA - Advances in Consumer Research Volume 15, eds. Micheal J. Houston, Provo, UT : Association for Consumer Research, Pages: 249-255.

Advances in Consumer Research Volume 15, 1988      Pages 249-255

FAILURES OF INFORMATION IN HEALTH CARE MARKETING

Minette E. Drumwright, Harvard Business School

Nancy M. Kane, Harvard School of Public Health

ABSTRACT -

The deluge of information concerning hospital care appears to have failed to prompt the positive market reforms promised by economic theory. The positive market reforms hinge on at least some purchasers making informed purchase decisions, which occur when purchasers have the motivation to acquire information, the ability to interpret it, and the incentive to use it. The three potential users of information to make hospital purchase or consumption decisions are the ultimate consumer, the professional purchaser (i.e., the insurer), and the group purchaser (i.e., the company). When the likelihood of each purchaser to make informed decisions concerning hospital care is examined, the group purchaser appears most promising.

INTRODUCTION

Health care costs, particularly those for hospital care, have been a national concern since the mid-70s when they spiraled upward with double digit increases. Economic theory suggests that information about hospital care, which accounts for 40 percent of all health care expenditures, could have pro-competitive effects on the market and lead to lower prices (e.g., Stigler 1961). Antitrust enforcement agencies such as the Federal Trade Commission and many consumer groups have argued that health care advertising could produce more vigorous competition, leading to lower fees and higher quality of care (Bloom and Stiff 1980). In fact, advertising did result in lower average prices for eyeglasses (Benham 1972, Benham and Benham 1975), eye examinations (Feldman and Begun 1978), and drugs (Cady 1976).

In recent years, numerous information programs have been instituted to help consumers shop for lower-priced hospital care. For example, hospital buying guides have been published by state organizations (e.g., the Maryland Services Cost Review Commission), business coalitions (e.g., the Utah Health Cost Management Foundation), private consumer organizations (e.g., the Center for the Study of Services), hospitals (e.g., the Council of Community Hospitals of Minneapolis/St. Paul), and employers (e.g., the Quaker Oats Corporation). In addition, hospitals spent an estimated $400 million on advertising in 1985 as compared to an estimated $50 million in 1983 (Advertising Age, 1985).

Despite the increase in information, hospital costs rose at four times the general rate of inflation in 1986 after relatively moderate increases in 1984 and 1985. Increases in hospital costs for 1979-1986 are compared to increases in the general rate of inflation, as reflected by the Consumer Price Index, in Table 1. Insurers estimate that the increases in hospital costs in 1986 will be translated into premium increases of 10 to 20 percent by year-end 1987.

The deluge of information about hospital care appears to have failed to prompt the positive market reforms promised by economic theory and hoped for by antitrust enforcement agencies and consumer groups. The purpose of this paper is to examine this apparent failure of information in an effort to understand the role that information realistically can play in fostering positive market reforms.

TABLE 1

The Economics of Information

The economic model asserts that consumers will search for information until the expected marginal cost of acquiring information exceeds the expected return. When information is readily available, the costs of search are lowered. As a result, consumers can comparison shop more efficiently and effectively. Comparison shopping enables consumers to make informed purchase decisions, which lead to more vigorous competition. The end result is higher quality at lower prices.

The economic model was validated empirically in studies of eyeglasses (Benham 1972, Benham and Benham 1975), eye examinations (Feldman and Begun 1978), and prescription drugs (Cady 1976). In each study, average prices for the products or services in question were lower in states permitting advertising than in states restricting advertising.

Behavioral Aspects of Information Search

The competitive market scenario hinges on at least some purchasers making informed decisions in which they choose the lowest-priced provider with the desired level of quality. To make informed decisions, purchasers first must be motivated to acquire information concerning the price and quality of alternatives. Second, they must have the ability to interpret the information. Third, they must have incentives to use the information in decision making. A conceptual model of an info med decision can be expressed as follows:

Informed        (Motivation to acquire information)

Purchase = f   (Ability to interpret information)

Decision         (Incentive to use information)

The three components of an informed decision suggest that the perceived costs of search are determined by two factors: the cost of acquiring information and the cost of interpreting it. The following expression represents the conditions fostering search behavior:

Perceived             Perceived costs                 Perceived costs

benefits       >        of acquiring             +      of interpreting

of search               information                       information

The perceived costs of acquiring information are influenced by two factors: 1) the number of providers in the market and 2) the availability of credible advertising or other information programs. When there are few providers, many people have experiences with the providers, and word-of-mouth information on all providers is more readily available (Pauly and Satterthwaite 1981). In contrast, when the number of providers in a market is large, fewer people within an individual's circle of acquaintances have experience with a specific provider, and information about all providers is scantier and more costly to acquire. In this case, advertising and public information programs could decrease the cost of acquiring information.

The perceived cost of interpreting information is influenced by the characteristics of the products or services involved. Economists have distinguished between "search," "experience" (Nelson 1970), and "credence" (Darby and Karni 1973) characteristics. Search characteristics can be ascertained and evaluated before purchase, while experience characteristics can be discovered and evaluated only after purchase as the product or service is consumed. Credence characteristics cannot be evaluated through normal use even after purchase and consumption. Instead, their evaluation requires additional costly information, probably from an expert. One can infer that search characteristics are least costly to evaluate, while experience characteristics are moderately costly. Evaluation of credence characteristics is quite costly.

Hospital Care Purchasers

Three parties are potential users of information as purchasers and/or consumers of hospital care. One is the ultimate consumer, the patient; another is the professional purchaser, the insurer (e.g., the health maintenance organization or the preferred provider organization). Yet another is the group purchaser, the company purchasing health care services directly or through insurance on behalf of its employees. Each of the parties has a direct economic or personal health stake in the hospital choice.

While physicians often both restrict and influence the patient's choice of hospitals, they neither pay for nor directly consume hospital care. We assert that parties with direct economic or personal health stakes are those most likely to use price information (or to prompt physicians to use it) to make informed decisions. Our rational is that price carries significantly less weight in physicians' preferences than it does in the preferences of consumers and purchasers. The explanation for physicians' relative insensitivity to prices is partly philosophical and partly practical. It is philosophical in that physicians are taught that consideration of treatment costs should not influence their referral recommendations, and it is practical in that most physicians are unaware of the prices of many of the services that they order or recommend on behalf of patients. We leave an examination of physicians' potential impact as users of information for another discussion. In this paper, we will examine the likelihood of the ultimate consumer, the professional purchaser, and the group purchaser to search for information and make informed decisions in purchasing hospital care.

THE ULTIMATE CONSUMER

The ultimate consumer makes two types of purchase decisions regarding hospital care. One type is the choice of a hospital at the time of need, which is sometimes constrained by the choice of physician. The other type is the choice of a health care plan in advance of the time of need. Little direct evidence exists concerning consumer perceptions of the costs and benefits of searching for information regarding these two decisions. However, from studies dealing with consumers' knowledge of hospital prices and quality issues, we can infer the probable costs and benefits of search.

Price Knowledge

Two indicators suggested by economic theory the degree of price dispersion and the shape of price distributions-can be used to infer how much consumers search for and know about hospital prices. Price dispersion, which economists have viewed as a measure of "ignorance in the market" (Stigler 1961), provides a rough indicator of consumer access to price information. ID a study of price dispersion, Marquis, Kanouse and Brodsley (1985) calculated the coefficients of variation (i.e., standard deviations divided by means) for the products and health care services in Table 2.

The products and services were divided into two groups of approximately equal prices to enable appropriate comparisons. Note that the coefficients of variation of prices for routine health care services in the lower-priced category fell roughly in the mid-range of the measures for other similarly priced products and services. This finding suggests that consumer search for price information about routine and frequently used medical services is comparable to that for a variety of other consumer products. In contrast, the coefficients of variation of prices for hospital and surgical services were greater than for similarly priced products, as shown in Table 2. Thus, Marquis, Kanouse and Brodsley (1985) suggested that consumers were less informed about hospital and surgical prices than about the prices of other similarly priced goods and services.

The shape of price distributions also indicates the amount of consumer information. Wilde and Schwartz (1979) demonstrated that the most common point, the mode, in the price distribution depends on the number of informed consumers who price shop. If the number of informed consumers is high enough, the modal point will occur at the lower range of prices. As the number of informed consumers decreases, the modal point in the price distribution moves up to the higher range of prices. In studying the variation in medical fees within 24 states, Hsiao (1980) reported that the modal points in the distributions of prices for common medical procedures, such as routine office visits, was in the lower price range. The opposite was true for surgical and hospital related charges. Thus, the shapes of price distributions supported the notion that consumers have a relatively high degree of information about prices for routine care and less information about surgical and hospital services.

TABLE 2

VARIATION IN HEALTH CARE FEES AND PRICES OF OTHER SELECTED PRODUCTS AND SERVICES

One explanation of the lower level of search for and knowledge about hospital and nonroutine physician prices as compared to routine office care prices involves the frequency of use, which can affect both the perceived costs and benefits of search. Because consumers can draw on their own experiences or those of their friends or family members for a routine service such as pediatric care, the costs of search are relatively low. In contrast, because hospital and surgical services are consumed infrequently, information often is not readily available from personal experience or through that of acquaintances.

The benefits of search also may be lower for infrequently used services. For example, consumers may project that the benefits from finding a lower-priced pediatrician will accumulate through repeat purchases. In contrast, consumers may believe that the benefits of searching for a lower-priced hospital will have to be reaped in one stay. In addition, consumers may perceive that they have very limited options because their choice of hospitals is limited to the ones where their physicians have hospital privileges. The limited options could further decrease the perceived benefits of search, or they could increase the perceived costs in that selecting a lower-priced hospital could necessitate changing physicians.

The perceived benefits of price shopping for hospital care are lowered still further by third party payment. Because 90 percent of hospital bills are paid by third parties, consumers have little reason to give much thought to price. In theory, changing insurance coverage provisions so that consumers share more extensively in hospital costs should encourage them to search more. However, the results of the only study to investigate directly the effects of cost-sharing on search for lower-priced hospitals contradicted the theory. Newhouse and Phelps (1976) found that the elasticity of the room and board prices of the hospital chosen with respect to the coinsurance rate was only .05, which suggests that cost-sharing does not encourage greater efforts to search for lower-priced hospitals. In addition, front-end deductibles such as that required by Medicare for hospital care (e.g., the first $500) probably will not encourage price shopping because price will not influence the deductible cost to the consumer. Thus, cost sharing is not likely to motivate consumers to acquire price information on infrequently used hospital and physician services.

Research concerning how consumers select nonhospital providers whose services are not covered by third parties suggests how information might interact with changes in insurance coverage to encourage price shopping. Pauly and Satterthwaite (1981) theorized that when few physicians are in an area, most people will have friends who have experienced these physicians, and information will be easier and less costly to obtain. In contrast, when the number of physicians in a market is large, information is scantier and more costly to acquire. Empirically, Pauly and Satterthwaite found the average prices of physicians were lower in markets with fewer physicians. This finding suggests that information is particularly costly to acquire in areas with many hospitals. Even if changes in insurance coverage were made to increase the benefits of search, the costs still might outweigh the benefits in markets with many hospitals.

Quality Knowledge

Although consumers consistently rate quality as the most important factor in selecting health care (Berkowitz and Flexner 1980, Boscarino and Steiber 1982, Jackson and Jensen 1984), they appear to lack knowledge about indicators of quality. For example, some patients choose to undergo surgical procedures in hospitals where they are performed relatively infrequently despite evidence that post-operative mortality rates at the hospital level are related to the number of procedures performed (Greenberg 1983). In addition, Newhouse, Ware and Donald (1981) found that few consumers were knowledgeable about physician board certification, hospital privileges or license renewal.

Hospital quality information, which is composed largely of credence characteristics, is problematic in that it has to be acquired and then interpreted. As is typical for credence characteristics, consumers cannot effectively or efficiently evaluate the technical quality of hospital care even after consumption. Evaluation, if possible at all, requires additional costly information, most likely from health care professionals.

Research has demonstrated hat when quality is ambiguous or difficult to interpret, consumers sometimes infer quality from price, assuming that high prices indicate high quality (Shapiro 1968, Grossman and Stiglitz 1976). These findings suggest that providing price and quality information about hospitals could result in consumers selecting higher priced hospitals, which would increase total hospital care expenditures.

As is often the case for products and services with credence characteristics, no simple quality measures exist for the technical aspects of hospital care, and the measures that are used are often ambiguous and subject to misinterpretation. For example, some hospitals such as Eisenhower Medical Center in Rancho Mirage, California, and St. Luke's Medical Center in Phoenix, Arizona, have advertised mortality statistics for open heart surgery. Mortality statistics as measures of hospital quality are not accurate enough to provide valid comparisons. For example, they are not adjusted for age, sex, racial and lifestyle differences or for the severity of illness of the patients admitted. In addition, the buying guides, which are prepared by independent organizations, are often so complex as to defy processing by nonmedical people. For example, the directory entitled "Hospital Prices by Case Mix Product", which is published by the Council of Community Hospitals in Minneapolis/Saint Paul, includes 33 pages of photo-reduced computer print-outs with technical terms, abbreviations and numbers. It presents information for broad diagnostic categories only. Research findings concerning how much information to give consumers to optimize decision making (Jacoby, Speller and Kohn-Berning 1974), how many alternatives to present to maximize search (Swartz and Stephens 1984), and how to format information to facilitate processing (Bettman 1975) could reduce the consumer's costs of interpreting the buying guides. However, these tactics most likely will not impact consumers' incentive to use information.

Consumers also have problems selecting health plans, which offer a barrage of options regarding cost sharing, benefits and choice restrictions. Research findings suggest that consumers do not choose plans that maximize their net expected benefits (i.e., expected benefits less out-of-pocket costs) as one would expect of an economically rational consumer. Instead, consumers lend to select plans that provide first-dollar coverage (i.e., low deductibles) and unlimited choice among providers. Fuchs (1976) reported that consumers preferred plans providing first-dollar coverage, even if their catastrophic expenses were not limited, over catastrophic coverage plans with high deductibles. Likewise, Little (1983) observed that approximately half of the employees in two different firms selected a $200 deductible plan over a $400 deductible plan even though the premium for the higher deductible plan was almost $200 lower. In preferring first dollar coverage, consumers appear to want insurance for what they consider likely (but affordable) events (e.g., a hospital bill of a few thousand dollars) as opposed to unlikely, but financially catastrophic events (e.g., a hospital bill for $250,000).

Other research has shown that consumers are likely to retain coverage that is not cost-effective through inertia (Tessler and Mechanic 1975). That is, many people do not consider all the alternatives that are available to them at annual plan renewal time.

Prospects of Consumers Making Informed Decisions

Consumers do not appear to have either the motivation to acquire price-quality information, the ability to interpret it, or the incentive to use it to make informed decisions about hospital care or insurance. The primary hindrance appears to be consumers' inability to interpret information with credence qualities, which increases the costs of search. In addition, the perceived benefits of search are not motivating, particularly with regard to price. Thus, the perceived costs of consumer information search appear to outweigh the perceived benefits. The prospects of information affecting consumer decision making in a manner that can dramatically reform the health care market are not encouraging. As a result, we turn our attention to the professional purchasers of hospital care.

PROFESSIONAL PURCHASERS OF HOSPITAL CARE

The early breed of HMOs (e.g., Kaiser, Harvard Community Health Plan) appeared to be astute users of price-quality information to purchase hospital and other nonroutine care. These organizations fostered high expectations of cost containment that would put a large and lasting dent in the nation's health care bill. Before 1980 when the HMO national market share was below three percent, studies consistently indicated that HMOs reduced health expenditures per enrollee by 10 to 40 percent (Luft 1980). The reduced expenditures were realized in part through recruiting conservative practitioners and choosing hospitals based on price-quality considerations whenever possible. However, recent studies have indicated that HMOs have failed to lower hospital costs dramatically or consistently, which suggests that they have not continued to be astute users of information. For example, Newhouse (1981) found that HMO cost increases were not significantly below those of indemnity plans. The results of a 1986 survey revealed that one third of the companies reported that HMOs were more costly than their traditional indemnity plans, while 27 percent reported no substantial differences in costs (Hewitt Associates Survey, 1986). Only 40 percent reported that HMOs had been less costly.

Based on HMOs' pre-1980 record of reduced costs and their professional expertise in the health care market, one can assert that HMOs have the ability to gather and interpret price-quality information to make informed purchase decisions. Thus, an examination of HMOs' incentive to use the information in making informed decisions is warranted.

The few HMOs that fostered high expectations of cost containment were very different from the more than 500 HMOs in the market today. Perhaps the most significant difference has involved a change in HMOs' missions. The missions of early HMOs were to deliver high quality, preventive-oriented care efficiently to a relatively small group of people in a local market. In today's competitive environment, if HMOs don't achieve critical mass in the marketplace quickly, they will not survive. Thus, tactics which enable HMOs to recruit physicians, hospitals and enrollees (i.e., gain market share) can take precedence over cost control. For example, U.S. Health Care System (USHCS), a leader in the new breed of HMOs, was one of the first of approximately 20 HMOs expected to enter the New York City market. To qualify for a license, USHCS had to recruit the required number of physicians serving a large geographical area quickly--more quickly than other potential HMO entrants. In the race to be among the first to qualify for a license, USHCS ran an advertising blitz in the New York Times to attract physicians. It is highly unlikely that the USHCS physician roster consisted primarily of conservative, prevention-oriented physicians. In a rapid pursuit of market share, the costs of gathering information can appear high, and the incentive to use it to make informed decisions can appear low.

HMOs have engaged in a similar indiscriminate purchasing behavior in recruiting hospitals. For example, upon entering the Cincinnati market, the Choice Care HMO contracted with 27 hospitals, which was in essence any hospital willing to negotiate a contract, rather than selectively choosing hospitals according to effective cost containment criteria. Initially, Choice Care met with unprecedented success, enrolling 140,000 people and achieving the highest market share of any HMO in Cincinnati. However, by 1987, Choice Care was losing millions of dollars as a result of its indiscriminate purchasing strategies. Dramatically reorienting its modus operandi, Choice Care announced that only 12 to 15 hospitals, chosen according to price, access, and vague quality considerations, would receive contracts in 1987. However, the jury is still out concerning whether Choice Care can maintain sufficient market share after drastically reducing the hospital options of its constituents.

Prospects of Professional Purchasers Making Informed Decisions

Many HMOs are pursuing market share through providing consumers convenient access to as many physicians and hospitals as are willing to sign an HMO contract. Although HMOs, as professional health care purchasers, have the ability to interpret and evaluate price-quality information, the scramble for market share has stripped them of incentives to gather ant use the information to make informed purchase decisions. Other insurance plans operating as indemnity or preferred provider organizations face the same market share incentives as HMOs with even less incentive to companion shop beyond a very superficial level. Thus, the group purchaser of health care, the employer, is the only promising user of information remaining.

THE GROUP PURCHASER

Eighty percent of private insurance is sold on a group basis through the workplace, and health premium costs average 24 percent of corporate after-tax profits (Herzlinger and Schwartz 1985). Roughly 60 percent of corporate health care expenditures are spent on hospital care. Thus, corporations spend big dollars on behalf of large numbers of employees for hospital care. An examination of the case history of Tenneco, an oil and gas company with headquarters in Houston, illustrates the costs and benefits of information search for a group purchaser of hospital care.

Tenneco employs approximately 100,000 people throughout the country, and 65 percent of its private insurance expenditures are for hospital care. The main health care needs of its employees are for psychiatric problems, cancer, and cardiovascular disease. Unlike individual consumers, corporations like Tenneco purchase hospital care relatively frequently and can draw on their own experience in making purchase decisions, which lowers the cost of search. For example, Tenneco analyzed the claims data of its insurance carriers to identify its major sources of health care expenditures by provider. It then instituted a nationwide shopping effort for certain infrequent, expensive health care needs. For example, the company arranged to have all of its open heart surgery patients flown to Texas Medical Center in Houston, where the negotiated price was approximately $15,000 as compared to $37,000 at Stanford and $26,000 at Beth Israel in Boston.

Because the group purchaser inevitably will repeat purchase even the most infrequently needed forms of health care, the benefits of search will be accrued over a series of purchases. The perceived benefits from repeat purchase can motivate companies to retain or even hire health care professionals to assess the quality of providers and guide them in purchasing high quality care at competitive prices.

Tenneco developed a form of preferred provider organization (PPO) for catastrophic illnesses, which illustrates the manner in which group purchasers can use information to purchase the highest quality health care in the nation at competitive prices. Tenneco's vice president of health, environmental medicine and safety, Dr. Edward J. Bernacki, devised and implemented a PPO with cardiovascular surgery at Texas Heart Institute, oncologic surgery at St Joseph Hospital in Houston, cancer treatment at the M.D. Anderson Hospital, and neurosurgery at Baylor College of Medicine. At these four world premier institutions, Dr. Bernacki negotiated a 20 percent discount, which was passed on to the employee/patient. When individuals participating in Tenneco's plan anywhere in the country are diagnosed with a catastrophic illness, they call a toll free telephone number in the Houston office. The company then makes arrangements to fly them to Houston, pick them up in a limousine, and have them admitted to the appropriate hospital.

The Honeywell Corporation also provides an example of the manner in which a group purchaser can -shop effectively for health care on behalf of its employees. In 1986, Honeywell offered six health care plans to the 12,500 people employed at the company's Minneapolis headquarters. The company found that the six options, one indemnity plan and five HMOs, and their varied benefits were confusing to its employees. As a result, the company hired employee benefit specialists who extensively interviewed managers of the five HMOs that Honeywell offered. After determining the benefits that Honeywell employees used, the discounts that the HMOs had negotiated with providers, and how they monitored quality, Honeywell developed its own detailed specifications for a benefit plan. The company then put the benefit plan out for bid. In 1987, Honeywell awarded the contract to two PPOs, offering only two plans to employees. Both plans provided the same benefits, but differed in terms of the choice of providers offered. Employees only had to choose between paying more for virtually unrestricted access or paying less for restricted access to "preferred" doctors and hospitals. Thus, Honeywell shopped on behalf of employees for the aspects of health care that involve complex price-quality tradeoffs (e.g., the benefit package and quality assurance). However, they offered employees the opportunity to make the tradeoff between access to providers and out-of-pocket cost, characteristics that they can understand and evaluate.

Prospects Of Group Purchasers Making Informed Decisions

Corporations that purchase health care for employees are the only purchasers for whom the benefits of search appear to outweigh the costs. They alone fulfill all three of the components of an informed decision motivation to acquire price-quality information, ability to interpret it, and motivation to use it in decision making. Through relatively frequent and repeat purchases of hospital care, group purchasers have access to the price-quality information for a wide population base, which lowers the cost of search They also have the resources to hire professional evaluators, who provide the ability to interpret price quality information. Because they will undoubtedly repurchase even the most infrequent hospital services, group providers will reap the benefits of pu chase through multiple hospital stays and reduced group premium rates, which provide incentives to use the information.

For group purchasers to affect the market favorably, many must radically change their role in benefits provision. They must change impassive purchasers to active shoppers and shapers of alternatives for their employees. Such a change should be analogous to the shift in corporate perspectives toward support of health promotion that occurred in the late 1970s and early 1980s. Corporations shifted from passive neutrality to active proponents and facilitators of exercise and disease prevention. As active shoppers and shapers of health care alternatives, group purchasers could provide the critical mass of informed decisions need to bring the competitive market scenario and its beneficial effects into play.

We readily acknowledge that many of the people who most need assistance with hospital care purchases, such as unemployed and retired individuals, do not have access to group health plans. Thus, they would not benefit directly from the use of information by group purchasers. However, they could benefit indirectly if group purchasers provide the critical mass of informed decisions needed to bring about positive market reforms.

CONCLUSION

Considering the three purchasers of health care information has led us to suggest the framework in Table 3 for identifying the appropriate target group for information about various types of health care products and services. The framework is based on two factors: 1) the frequency with which the health care service is used by consumers (i e., low/high frequency), and 2) the number of providers available to consumers (i.e., few/many providers). To the left of the dividing line in Table 3, we propose that consumers are the most appropriate target of health care information. To the right of the line, we suggest that group purchasers are the appropriate targets.

If the frequency of use is high and the providers are few (cell 1), then consumers will be likely to use information to make informed decisions. The high frequency of use increases the perceived benefits of search while the low number of providers reduces the perceived cost of search Most likely, word-of-mouth information will be sufficient to bring about positive economic effects. Routine primary care, such as pediatric care, provides an example. The market for pediatric care is quite localized in that people select pediatricians near their homes. In a given neighborhood, there will be relatively few pediatricians, which lowers information costs. Because consumers use the services frequently, they most likely have the ability to evaluate them. The repeat purchases resulting from the frequency of use increase the perceived benefits of the search.

TABLE

However, when the number of providers increases for frequently used services (cell 3), the search costs increase in that acquiring word-of-mouth information becomes inefficient, as suggested by Pauly and Satterthwaite (1981). In this case, advertising to consumers could bring about positive market reforms. Eyeglasses, eye examinations, drugs and dental care represent frequently used services with many providers.

When the frequency of use is low (cells 2 and 4), group purchasers tend to be the most appropriate targets of information. Interpretation costs tend to be high in both cells in that infrequently used services tend to be the more complex and sophisticated ones. However, when there are few providers, ward-of-mouth information could lower the search costs in cell 3 enough to enable efficient search by consumers. For example, the fact that bone marrow transplants are performed at only a few institutions nationally simplifies search Nonetheless, the likelihood of an individual consumer negotiating a price advantage is low. The cumulative experience of the group purchaser brings greater market clout.

Most hospital care (e.g., gall bladder operations, heart surgery, appendectomies, tonsillectomies) is representative of cell 4. Information is costly both to acquire and interpret and the perceived benefits of search are low to the ultimate consumer. Thus, the group purchaser is the appropriate target of information, which must be presented in the complex, technical manner needed to represent credence characteristics.

In conclusion, we assert that information can bring about positive economic reforms in the health care market only when the appropriate type of information is available to the purchaser-consumer most likely to use it in making informed decisions. Group purchasers are most likely to have both the motivation and the ability to acquire, interpret and use information in making informed decisions concerning most hospital care.

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