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A model is only as good as its assumptions: A reply to Peele
Journal of Health Economics
12 (1993) 209-211. North-Holland
espanse
A model is o ly as good as its assumptions: a reply to Thomas Rice Department USA
of Health Services, School of Public Ijealth, University of Califuniu,
Los Angeles, CA,
Pamela Peele and I largely agree on the definition of welfare losses and policy interventions that will reduce their magnitude. Our primary difference is on whether the traditional model itself is worth salvaging. Before addressing this difference of opinion, I -want to comment on two other points that she makes, First, Peele states that if a patient is already receiving a large number of a particular ‘effcctive’ type of service, then a price increase might make thaL patient forgo consumption of the last few units since their marginal value is low. Thus, a patient making the ‘right’ decision in the wake of price increases would forgo the purchase of not only medically less effective services (whose marginal benefits would no longer exceed costs), but also forgo more of the effective services as well. This implies that the findings from the RAND Health Insurance Experiment (HIE), which concluded that coinsurance reduced the consumption of medically effective and less effective services by the same amount (Lohr et al., 1986), could be consistent with the traditional welfare loss model. Although this argument is sound theoretically, it cannot explain the Lohr et al. findings from the HIE. While it is possible that cost sharing would deter a patient from seeking the last visit for a highly effective regimen of care, results from the HIE definitely show that this did not occur. Reeler and Rolph (1983) found that the reduction in utilization attributed to coinsurance was entirely due to a decrease in the number of medical episodes for which care was sought, not the amount of care received per episode. Thus, Peele’s scenario of a patient forgomg the fifteenth immunization could not possibly be responsible for the HIE’s findings. Second, Peele is correct in noting that the judgments of medical experts as to the appropriateness of services may undervalue certain attributes of concern to the patient, such as high pain costs and the value of time. I agree Correspodenct? to: T. Rice, Ph.D. Department of Health Services, School of Public He&h, ___ .,.“‘.J;t I of Ca]ifofq&, L.A:, 10833 Le Conte Avenue_ Los Angeles, CA 380241772, USA.
1 lniverc
O!6?--6296/93/P;06.00 (: \ 1993~Ekevier :
Science Publishers B I,‘. All rights -eserved
210
7I Rice, A model is only as good as its assumptions
with her recommendation that physicians and other medical experts should be made cognizant of, and explicitly consider, these valuations in their development of practice guidelines. But it is unlikely that these factors alone can explain the Lohr et al. results. To do so, there would have to be a strong correlation between these patient valuation factors and the medical effectiveness categories developed in the HIE; Peele does not demonstrate that such a correlation exists. Those things aside, I disagree not with Peele’s analysis, but rather with her conclusion the traditional welfare model should be retained. She states that it is not the model per se, but our inability to evaluate the marginal benefits and marginal costs of medical care as perceived by the patient, that is at fault. Although technically correct, Peele does not confront the key issue - is it possible to improve consumer information enough to trust their consumption decisions as being indicative of the marginal benefits they receive? Peele (and probably most economists) believe that it is, since she suggests that, ‘The obvious solution is to improve the patient’s information set.’ The problem is that no matter how hard we try to improve information, it will not be sufficient to make patients able to judge the true marginal value of medical care services. As Weisbrod ( 1878) pointed out fifteen years ago in a lengthy but exti-aordinarily insightful passage, the information problem in health care is unique because the consumer continually faces counterfactual questions that may be impossible to answer. He writes, For ordinary goods, th; buyer has little difficulty in evaluating the counterfactual - that is, what the situation will be if the good is not obtained. Not so for the bulk of health care . . . Becar:ae the human physiological system is itself an adaptive system, it is likely to correct itself and deal effectively with an ailment, even without any medical care services. Thus, a consumer of such services who gets better after the purchase does not know whether the improvement was because of, or even i:l spite of, the ‘care that was received. Or if no health care services are purchased and the individual’s problem becomes worse, he is generally not in a strong position to determine uvhether the results would have been different, and better, if he had purchased certain health care. And the consumer, not being a medical expert, may learn little from experience or from friends’ experience . . . because of the difficulty of determining whether the counterfactual to a particular type of health care today is the same as it was the previous time the consumer, or a friend, had ‘similar’ symptoms. The noteworthy point is not simply that it is difficult for the consumer to judge quality before the purchase . . . , but that 2 is difficult even after the purchase ip. 52).
Weisbrod concludes that, ‘Xhen buyers have difficult quality-evaluation problrms, the theorem of e:conoC=!s that more information . . . is always preferred to less need not hold’ (p. 54). Although Peele makes a reasonable point that the traditional model of
T: Rice, A ntodel’ is on/;) as good as its assumptions
211
evaluating welfare losses from excess health insurance would work if consumer information were sufficiently reliable, I would contend that it is not reliable, and may never be. A model is of little use if it is based on assumptions that do not reflect real world behavior. Because the traditional model employs such assumptions about consumer ability to judge marginal benefits in a counterfactual world, it should be scrapped in favor of something that does a better job. In my original piece (Rice, 1992), I argued that new work on medical care effectiveness and outcomes should provide us with sufficient information to evaluate welfare losses in an entirely different manner - based on whether services provided are medically effective. As a profession we do ourselves a disfavor by clinging to a model that is based on how we war,‘, Consumers to behave, rather than on what they really do. References Keeler, E.B. and J.E. Rolph, 1983, How cost >haring reduced medical spending of participants in the health insurance experiment, Journal of the American Medical Association 249, 2220-2222. Lohr, K. et al., 1986, Effect of cost sharing on use of medically effective and less effective care, Medical Care 24, S3 l-S38 Rice, T., 1992, An alternative framework for evaluating welfare losses in the health care market, Journal of Health Economics 11, 86-92. Weisbrod, B.A., 1978, Comment on Mark Pauly’s essay, Is medical care different?, in: W. Greenberg, ea., Competition in the health care sector: past, present, and future (Federal Trade Commission, Washington, DC) 49-54.
12 (1993) 209-211. North-Holland
espanse
A model is o ly as good as its assumptions: a reply to Thomas Rice Department USA
of Health Services, School of Public Ijealth, University of Califuniu,
Los Angeles, CA,
Pamela Peele and I largely agree on the definition of welfare losses and policy interventions that will reduce their magnitude. Our primary difference is on whether the traditional model itself is worth salvaging. Before addressing this difference of opinion, I -want to comment on two other points that she makes, First, Peele states that if a patient is already receiving a large number of a particular ‘effcctive’ type of service, then a price increase might make thaL patient forgo consumption of the last few units since their marginal value is low. Thus, a patient making the ‘right’ decision in the wake of price increases would forgo the purchase of not only medically less effective services (whose marginal benefits would no longer exceed costs), but also forgo more of the effective services as well. This implies that the findings from the RAND Health Insurance Experiment (HIE), which concluded that coinsurance reduced the consumption of medically effective and less effective services by the same amount (Lohr et al., 1986), could be consistent with the traditional welfare loss model. Although this argument is sound theoretically, it cannot explain the Lohr et al. findings from the HIE. While it is possible that cost sharing would deter a patient from seeking the last visit for a highly effective regimen of care, results from the HIE definitely show that this did not occur. Reeler and Rolph (1983) found that the reduction in utilization attributed to coinsurance was entirely due to a decrease in the number of medical episodes for which care was sought, not the amount of care received per episode. Thus, Peele’s scenario of a patient forgomg the fifteenth immunization could not possibly be responsible for the HIE’s findings. Second, Peele is correct in noting that the judgments of medical experts as to the appropriateness of services may undervalue certain attributes of concern to the patient, such as high pain costs and the value of time. I agree Correspodenct? to: T. Rice, Ph.D. Department of Health Services, School of Public He&h, ___ .,.“‘.J;t I of Ca]ifofq&, L.A:, 10833 Le Conte Avenue_ Los Angeles, CA 380241772, USA.
1 lniverc
O!6?--6296/93/P;06.00 (: \ 1993~Ekevier :
Science Publishers B I,‘. All rights -eserved
210
7I Rice, A model is only as good as its assumptions
with her recommendation that physicians and other medical experts should be made cognizant of, and explicitly consider, these valuations in their development of practice guidelines. But it is unlikely that these factors alone can explain the Lohr et al. results. To do so, there would have to be a strong correlation between these patient valuation factors and the medical effectiveness categories developed in the HIE; Peele does not demonstrate that such a correlation exists. Those things aside, I disagree not with Peele’s analysis, but rather with her conclusion the traditional welfare model should be retained. She states that it is not the model per se, but our inability to evaluate the marginal benefits and marginal costs of medical care as perceived by the patient, that is at fault. Although technically correct, Peele does not confront the key issue - is it possible to improve consumer information enough to trust their consumption decisions as being indicative of the marginal benefits they receive? Peele (and probably most economists) believe that it is, since she suggests that, ‘The obvious solution is to improve the patient’s information set.’ The problem is that no matter how hard we try to improve information, it will not be sufficient to make patients able to judge the true marginal value of medical care services. As Weisbrod ( 1878) pointed out fifteen years ago in a lengthy but exti-aordinarily insightful passage, the information problem in health care is unique because the consumer continually faces counterfactual questions that may be impossible to answer. He writes, For ordinary goods, th; buyer has little difficulty in evaluating the counterfactual - that is, what the situation will be if the good is not obtained. Not so for the bulk of health care . . . Becar:ae the human physiological system is itself an adaptive system, it is likely to correct itself and deal effectively with an ailment, even without any medical care services. Thus, a consumer of such services who gets better after the purchase does not know whether the improvement was because of, or even i:l spite of, the ‘care that was received. Or if no health care services are purchased and the individual’s problem becomes worse, he is generally not in a strong position to determine uvhether the results would have been different, and better, if he had purchased certain health care. And the consumer, not being a medical expert, may learn little from experience or from friends’ experience . . . because of the difficulty of determining whether the counterfactual to a particular type of health care today is the same as it was the previous time the consumer, or a friend, had ‘similar’ symptoms. The noteworthy point is not simply that it is difficult for the consumer to judge quality before the purchase . . . , but that 2 is difficult even after the purchase ip. 52).
Weisbrod concludes that, ‘Xhen buyers have difficult quality-evaluation problrms, the theorem of e:conoC=!s that more information . . . is always preferred to less need not hold’ (p. 54). Although Peele makes a reasonable point that the traditional model of
T: Rice, A ntodel’ is on/;) as good as its assumptions
211
evaluating welfare losses from excess health insurance would work if consumer information were sufficiently reliable, I would contend that it is not reliable, and may never be. A model is of little use if it is based on assumptions that do not reflect real world behavior. Because the traditional model employs such assumptions about consumer ability to judge marginal benefits in a counterfactual world, it should be scrapped in favor of something that does a better job. In my original piece (Rice, 1992), I argued that new work on medical care effectiveness and outcomes should provide us with sufficient information to evaluate welfare losses in an entirely different manner - based on whether services provided are medically effective. As a profession we do ourselves a disfavor by clinging to a model that is based on how we war,‘, Consumers to behave, rather than on what they really do. References Keeler, E.B. and J.E. Rolph, 1983, How cost >haring reduced medical spending of participants in the health insurance experiment, Journal of the American Medical Association 249, 2220-2222. Lohr, K. et al., 1986, Effect of cost sharing on use of medically effective and less effective care, Medical Care 24, S3 l-S38 Rice, T., 1992, An alternative framework for evaluating welfare losses in the health care market, Journal of Health Economics 11, 86-92. Weisbrod, B.A., 1978, Comment on Mark Pauly’s essay, Is medical care different?, in: W. Greenberg, ea., Competition in the health care sector: past, present, and future (Federal Trade Commission, Washington, DC) 49-54.