When a little regulation can make a market much more efficient

Usually, we don't think of economists mentioning regulation and efficiency in the same sentence--unless one is arguing that regulation will lead to inefficiency. However, there is a front page story in today's Wall Street Journal entitled "Hospitals Find Way to Make Care Cheaper -- Make It Better". (Unfortunately, for this one you'll need to either have an electronic subscription or get the paper copy to see it, so I won't provide a link.) This article focuses on experience in Pennsylvania with the Pennsylvania Health Care Cost Containment Council.

This council has required hospitals to report "death and complication rates...from more than 50 types of treatments and surgery at hospitals." Key finding: when these data are available to consumers—and to the employers of consumers—the care gets better and costs often go down.

Why is high quality care less expensive? Fewer complications and readmissions.

Why does this type of information lead to better care? Hospitals realize that if their quality is poor they will lose business.

Why are employers as important as consumers?  Employers are often the ones who choose which health plans to make available for their employees and the employers can work directly with health plans in ways that individuals cannot to make sure that patients are directed to higher quality hospitals?

Why does this information not come out of a free market on its own? Quality of medical care is hard to judge and the producers don't have to make as much effort if their quality level remains a mystery.

So, does this mean that all regulation is good? No. But in a situation in which there is a product with quality that is difficult to identify and prices that are not easily apparent to consumers, forcing producers to be as transparent as possible with quality data (and, arguably, there still are some shortcoming in the system) and prices can make the system operate more efficiently.