A few years ago, a team of researchers from the University of Innsbruck ventured across Austria to fix their computers, which they purposely broke. They were conducting an experiment to ask a very simple question: does insurance make merchants and vendors dishonest?
To do this, the experimenters bought several laptops and damaged the RAM. Fixing it is a small matter, and it would take a short afternoon to fix it at little cost. The team then went to 61 randomly chosen stores in various states in Austria and asked repair shops to fix their laptop.
Their hypothesis was that informing the repairmen that they have insurance results in more repair than needed, and overcharging of their services.
Hence, for each repairman, they would say either of these phrases after sending their laptop for repairs:
- “I will need a bill for the repair” (CONTROL group)
- “I will need a bill for the repair because I have insurance that covers the repair costs” (INSURANCE group)
At the end of the experiment, the experimenters found that the repairmen charged twice as much and worked twice as long for the INSURANCE group compared the CONTROL group. The results were published in a research article damningly titled “Insurance coverage of customers induces dishonesty of sellers in markets for credence goods”.
This experiment, while simple in nature, sheds light on why the recent proposed benchmarking by the Ministry of Health in Singapore is a great idea.
Wait a minute.
What does fixing laptops have to do with healthcare? Ever paid $100+ for a simple flu visit to the GP? However, before we go there, let’s take a quick look at a bit of Singapore’s history.
History of Fee Guidelines in Singapore
In 1987, the Singapore Medical Association released a fee guideline for medical procedures. In theory, the transparency is a good thing since both doctors and patients would know the price of the procedures offered. However, in 2007, the association withdrew the guideline as it was construed as anti-competitive, i.e. it presented a possibility of price fixing by doctors since doctors released the guideline themselves.
A decade later, the Ministry of Health recently introduced a fee benchmark which performs a similar function as its predecessor without the complication of being anti-competitive. Doctors, patients, and insurance companies are welcoming this change in 2018.
Why the Need for Benchmarking?
Presumably, this was rolled out in response to the rising trend of insurance claims by patients with riders in their integrated shield plans. Insurance companies are facing losses as medical claims increase in costs every year. The Life Insurance Association points to three trends that exacerbates this: 1) higher usage of IP and IP riders, 2) increasing number of claims for private medical treatment, and 3) higher doctor fees.
Why would the benchmark and the implied transparency make life a little easier for both patients and insurance companies? We already have the answer implied by the experiment – having fee transparency gives consumers insight into how much a procedure is usually charged.
Credence Goods and the Asymmetry of Information
Both repair services and medical treatment belong to type of good called credence goods. Credence goods are a type of object or service with qualities that cannot be observed by the consumer after purchase. It is hard for the consumer to judge the impact of the object/service, be it good or bad.
However, only the seller knows the impact which creates an imbalance of knowledge between the seller and consumer. In a fancier term used by economists, this imbalance of knowledge is called “asymmetric information”. Examples of credence goods include education, repairs, vitamins, and medical treatment.
Hopefully, with the benchmark going forward, patients can assess whether they’re being charged reasonably. Having a baseline will allow the market to operate more effectively, resulting in a win-win with all involved.
That’s All Folks!
We here at fundMyLife hope you found the story as fascinating as we did, since it was a simple case study that sheds light on a larger phenomenon.
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Post-script: The Experiment Results
In case you’re interested to know more about the results – two astonishing figures sum up the entire study:
Ooh, the graph looks pretty but what does it truly mean?
The top graph shows the distribution of repair prices in Euros between the two groups. An intuitive read of the graph is that the repair prices for the CONTROL group (blue line) range from 0 to 150 Euros. On the other hand, the repair prices range from 0 to 275 Euros when the experimenter indicated that there is INSURANCE involved (pink line).
The bottom graph shows the distribution of working time charged by the repairmen. In the CONTROL group the working time charged is at most 1 day, whereas for the INSURANCE group the range of working time charged is larger, all the way to 2.5 days.
Granted, this experiment was conducted in Austria, and there was a small sample size of 61 observations across 17 states. Nonetheless, it provides compelling perspective that there is a risk of overcharging in situations where there is an asymmetry of information.