Skepticism and credulity in the market for health care services Eric Schmidbauer with Dmitry Lubensky Kelley School of Business Indiana University October 27, 2012

Evidence of both over- and under-treatment “The most important contributor to the high cost of US healthcare….is overutilization” 1 There are almost 3 times as many MRIs per capita in the U.S. as the OECD average US patients receive considerably more coronary artery bypass grafts, angioplasties, and stents than OECD patients US patients utilize many more “new drugs”—those on the market 5 years or fewer—than patients in other countries “Patients with higher out-of-pocket costs were more likely to forgo medications when their trust in a physician was low.  Among low-trust patients, but not among high-trust patients, low income was associated with underuse of medication.”2 “…the likelihood of reporting unmet health care needs and delayed care was negatively related to patients’ trust in a physician in most patient groups.”2 “patients’ trust in a physician [is] positively related to patients’ reports of adherence to physician advice about smoking, alcohol use, seat belt use, diet, exercise, stress, and safe sex practices.”2 1Emanuel, Ezekiel J. and Victor R. Fuchs. June 2008. The Perfect Storm of Overutilization. Journal of the American Medical Association. 299(23): 2789-91. 2“Chapter 10: The Health Care Outcomes of Trust: A Review of Empirical Evidence” in Researching Trust and Health.  Brownlie, Greene, Howson. 2008.

What is happening here? Information transmission problem Expert biased towards overtreatment Fear of malpractice claims (“defensive medicine”) Fee for service Rational patients should not blindly follow a doctor’s advice The level of trust ought to be endogenous

Existing models Framework of Crawford and Sobel (Econometrica, 1982) Pitchik and Schotter (AER, 1987) De Jaegher and Jegers (Health Economics, 2001)

Overview of results Both over- and under-treatment are increasing in bias Total surplus is decreasing in bias More information is transmitted than in Crawford & Sobel Total surplus in our model is higher than in Crawford & Sobel

The model The doctor observes the patient's true health state θ∼U[0,1] and makes a recommendation for treatment m∈M=[0,1] UD(θ,b,a)= -(θ+b-a)² and UP(θ,a)= -(θ-a)², where b is the bias of the doctor The patient's action set is A={0,m}

Equilibrium Suppose the receiver rejects all messages below x and accepts otherwise. Then the sender induces action: min{θ+b,1} for high health states θ x for intermediate health states θ 0 for low health states θ Equilibrium actions as a function of θ Receiver’s preferred action as a function of θ Bias 𝑏=0.1 Health state θ~𝑈[0,1]

Other equilibria Non-threshold strategies Higher thresholds

Determination of threshold x For a given b, x is determined by satisfying Claim: undertreatment is increasing in bias 𝐸 θ| 𝑥 2 −𝑏≤θ<𝑥−𝑏 ≥ 𝑥 2 𝑥 2 −𝑏 𝑥−𝑏

Additional findings Claim: overtreatment is increasing in bias Claim: total surplus is decreasing in bias

Comparison to Crawford and Sobel Claim: more information is transmitted Claim: total surplus is higher

Summary & Implications The model is testable Data with variation in doctor bias Reducing bias will increase total surplus Requiring a doctor’s prescription improves information transmission and total surplus