Asymmetric Information and Medical Licensure

Cowen and Tabarrok are on target with this piece on the “end of asymmetric information.” It is an especially relevant point for policymakers concerned with innovation and competition in medical practice. For decades, asymmetric information—the inability of consumers to judge medical professionals—has been the go-to defense for state-level licensing activities.[1] However, rather than protecting consumers, state-level regulation has served as a vehicle for politically powerful physician groups to limit both the supply of physicians and the scope of practice of non-physician clinicians.[2] This has protected physicians from competition, limited access to care, and stifled efficiency-enhancing structural innovations in the provision of medical care.[3]


Access to Information

As in the other cases mentioned by Cowen and Tabarrok, some of the credit for retiring the asymmetric information defense for state medical professional licensing must go to improved technology. Information has been gathered in a more systematic fashion and it is more accessible to market participants. In particular, this has improved medical malpractice underwriting. One of the most significant consequences is that medical professional liability insurance is now experience rated.[4] In the past, doctors paid premiums based on impersonal factors—their location and specialty. Now they pay premiums that reflect their past performance and personal practice characteristics. Poorly managed practice risk can increase premiums by 500%. In addition, malpractice insurance contracts may require a physician to take specific actions to improve patient outcomes. In severe cases, individual physicians are denied malpractice insurance altogether. This creates strong incentives for risk management on the part of physicians.

Access to information has benefited consumers in other ways. Information available online has made it easier for individuals to select a doctor. Digital data sources have lowered the costs to hospitals, managed care organizations, health maintenance organizations, and health care insurance companies of evaluating the physicians with whom they contract or associate. Armed with information, these organizations can make better quality decisions. As a result, they may deny or limit hospital privileges or pull problem physicians from their panels or practices. These private enterprises are in a good position to evaluate and detect abnormalities in practice patterns or outcomes.

With so much access to data, it has become nearly impossible for physicians to hide their past questionable practices by moving across state lines.  Hospitals have access to the federal government’s National Practitioner Database. The public can go to the Federation of State Medical Boards’ DocInfo site for information one could not glean from a state license, such as disciplinary actions and medical specialty board certification. Also, individual states are increasingly making detailed information about medical professionals available online.[5]

Ironically, access to information has allowed researchers to examine the record of the state licensing boards. The evidence suggests the state boards have done a poor job; they have failed to identify the majority of risky physicians.[6] In addition, information that might help consumers make choices – for example, when a physician is taking part in a drug rehab program – is not made public.


Beyond Technology

Certification and Brand Name: In addition to the technology-related advances in access to information, there have been other relevant developments that weaken the case for state regulation. The first is the substantial growth in private certification of all types of medical professionals. Today it is estimated that over 80 percent of U.S. physicians and almost all newly minted physicians are medical-specialty-board certified.[7] State licensing is not specialty-specific, but knowing a physician’s specialty is a key component of consumer choice. Medical specialty board certification is so valuable as a measure of specialty-specific competence that it is advertised by physicians practicing medicine abroad (as in Thailand). And there has been a significant increase in the use of brand name in health care, as well-respected providers (Cleveland Clinic, Kaiser Permanente, and the Mayo Clinic, among others) are leveraging their reputations across the country. The addition of certification and brand name make it easier for consumers to assess physician competence, further reducing information asymmetries.

Liability: Perhaps the most critical development when it comes to consumer protection in health care markets has been the expansion of liability for medical malpractice. Liability initially rested with independent physicians. It has been expanded by the courts to include the providers who hire physicians, hospitals that credential and privilege physicians, and even, to some extent, the managed care organizations and insurance providers who include physicians in their networks or panels. Not only are their reputations at risk, but legal liability works to align their incentives with those of the patients they serve. Combined with the recent dramatic shift away from independent practice to direct employment of physicians by health care providers, growing institutional liability creates a strong incentive for oversight, a level of oversight it would be unrealistic to expect from a state agency.


Doctors Benefit from Restrictions to Entry

The state medical professional licensing apparatus has grown to be an important tool for the physician lobby, one which can be used it to reduce competition for physician services by limiting the scope of practice of non-physician clinicians (advanced practice nurses, physician assistants, podiatrists, pharmacists, etc.).[8] The variation across states in the influence of physicians has led to differences in what non-physician clinicians are allowed to do. Researchers have found that in states where clinicians are permitted to work up to the limit of their certification, non-physician clinicians provide a level of care equal to that of physicians. However, many states continue to limit the scope of practice of non-physician clinicians (for example, advanced practice nurses may not be allowed to prescribe drugs) to protect physician interests.

All states defer to the Liaison Committee on Medical Education (LCME), jointly managed by the American Medical Association and the Association of American Medical Colleges, to determine which medical education programs are acceptable. Only graduates of LCME-accredited programs qualify for state licenses. This gives these organizations veto power over innovations in medical education in the United States. It also gives them control over the number of seats in medical schools and, therefore,  control over the supply of physicians.[9]

State licensing laws have gotten in the way of innovations such as retail clinics and telemedicine, both of which have the potential to lower health care costs and improve access to care. State licensing laws preclude charitable organizations from bringing physicians across state lines to serve indigent populations.[10]



Cowen and Tabarrok are exactly right that asymmetric information is less of a problem given today’s technology. When it comes to health care, improvements in technology, along with changes in liability, certification, medical malpractice underwriting, and increased use of brand name offer protection against inept or malfeasant practitioners. But don’t expect the American Medical Association or other physician-funded lobbying groups to renounce state licensing of medical professionals. After all, the state regulatory structure has allowed physicians to maintain a position of inordinate power and influence in medical labor markets.


[1] Kenneth J. Arrow, Uncertainty and the Welfare Economics of Medical Care, 53:5 The American Economic Review (December 1963).

[2] The classic article is by Reuben A. Kessel: The A.M.A. and the Supply of Physicians, 35 Law and Contemporary Problems (Spring 1970).

[3] Shirley V. Svorny, Licensing Doctors: Do Economists Agree? 1 Econ Journal Watch (August 2004).

[4] Shirley V. Svorny, Could Mandatory Caps on Medical Malpractice Damages Harm Consumers? Cato Institute Policy Analysis No. 685 (October 2011).

[6] Peter Eisler and Barbara Hansen, Thousands of Doctors Practicing Despite Errors, Misconduct, USA Today (August 20, 2013); Alan Levine, Robert Oshel, and Sidney Wolfe, State Medical Boards Fail to Discipline Doctors with Hospital Actions Against Them, Public Citizen, (March 2011).

[7] “The American Board of Medical Specialties (ABMS) works in collaboration with 24 specialty Member Boards to maintain the standards for physician certification.”

[8] Shirley V. Svorny, Medical Licensing: An Obstacle to Affordable, Quality Care, Cato Institute Policy Analysis No. 621 (September 2008).

[9] American Association of Medical Colleges, Medical School Enrollment on Pace to Reach 30 Percent Increase by 2017, (May 2, 2013).

[10] John Ross, Bureaucrats Against Healthcare Access, The Freeman (November 6, 2013).

Also from this issue

Lead Essay

  • Tyler Cowen and Alex Tabarrok argue that the age of asymmetric information is coming to an end. In the traditional account, asymmetric information has some unfortunate effects: when the seller has much information and the buyer has little, only goods of poor quality generally appear on the market; they tend to be few in number, and they are bought mostly by rubes. Cowen and Tabarrok argue that this state of affairs, which may once have characterized the market for used cars, no longer obtains there – or in very many other places at all. Replacing it is a world of ubiquitous information, in which many regulations are no longer needed, but in which privacy concerns loom large.

Response Essays

  • Technology may or may not be eliminating asymmetric information. But either way, says Joshua Gans, regulation is here to stay. Whether it operates as a first line of resort or a last one, we ought not to do away with it entirely. From this perspective, technology should not so much abolish regulation as push it into the background and make less often invoked. Gans goes on to complicate the picture of technology delivering better information in the used car market: As cars become more reliable, they last longer, and they are more likely to go through multiple owners. The expansion of this market may have prompted technological developments in car-related information, rather than vice versa. Gans then turns to police body cameras, noting grimly that they only work when police themselves turn them on. He recommends pervasive citizen monitoring of authorities as the appropriate way to end this information asymmetry.

  • Shirley Svorny looks at the ways that patients, doctors, and hospitals are using information in new ways - and calling old regulations into question. Whereas state medical licensure may have served a valuable purpose in the past, it is much less clear that it maintains the same importance today. Better information technology as well as changes to liability, certification, and malpractice underwriting have combined to offer much better information to all parties in medical care. Innovations such as retail clinics, telemedicine, and increased roles for non-physician clinicians all stand to improve the quality of medical care while also reducing costs. But a big obstacle commonly remains: the state licensing laws themselves.

  • Jeff Ely takes a skeptical and Hayekian look at the idea that the age of asymmetric information is ending. He notes that improvements in information about health outcomes will not help solve the fundamental problems of risk sharing that the insurance market addresses. In Hayek’s way of thinking, markets exist above all because information is asymmetrical; if all players had all relevant information, market prices would be wholly unnecessary, and allocations would happen both voluntarily and without prices. That world is so utterly different from our own that it’s hard even to think about it for very long. It also shows no signs of materializing anytime soon.