Market-Based Health Reform Relies On Rational Consumers Who Don’t Exist

31 Aug

Like me, Dan Belsky is a doctoral student in the department of health policy & management at UNC. This is his first contribution to Wright on Health.

In the September 2009 issue of the Atlantic Monthly, David Goldhill—a business executive—writes about “How American Health Care Killed My Father.” Goldhill correctly diagnoses the fundamental problem with the health care system as one of incentives—we pay doctors and hospitals for more, rather than better, medicine—but errs terribly in its prescriptions for a solution.

Without directly acknowledging them, Goldhill proposes essentially the same market-based model economists began pushing in the 1970s and that lives on at the Heritage Foundation and other conservative think tanks. The basic idea is that if consumers are made to realize how much their health care costs—by making them pay for it out of pocket—”rational” consumers will force providers to deliver more effective medicine at lower cost. That’s how markets work, right? Producers deliver consumers ever cheaper and higher quality products in order to stay competitive. The problem is, it doesn’t always work that way.

See Exhibit A, the recent near-collapse of our global financial system. Products in the system were highly complex and consumers, even big institutional consumers able to pay professionals to vet their purchases, failed to make “rational” (i.e. profit maximizing) choices. Investors got caught up in a spirit of “irrational exuberance.” As some investors appeared to get rich quickly in a system where real-estate and its derrivatives went nowhere but up, other investors decided that they didn’t want to be left out of the party, even though they weren’t quite sure why everyone was celebrating. When the music stopped, people panicked, and dumped good investments along with the bad. Meanwhile, the rating agencies that were supposed to protect consumers by providing them unbiased information about the quality of investment products turned out to be not quite as independent from the folks selling investments as everyone thought.

Each of these three problems, complexity, irrational exuberance, and a lack of good information on the quality of goods and services, exists in parallel in health care. Modern medicine is every bit as complex as fancy Wall Street derivatives. Let’s look at an example. Marty, a 38 year old man, goes to see his doctor complaining of neck pain. His physician—like all physicians—has gone through four years of graduate school and additional residency training (2 to 10 years depending on specialty) before being allowed to serve patients without supervision. After residency, many physicians even undergo fellowships to receive more training.

Under this system, physicians are so specialized in their one area of medicine that they are barely able to evaluate choices made by their colleagues in other specialties. What chance does an “average” consumer like Marty have when it comes to understanding and making health care decisions? If Marty’s doctor suggests an MRI of his neck, how will Marty decide whether or not his pain warrants the scan, or if it is worth the $1,500? It could be nothing more than a bad pillow on the bed. Or, it could be a tumor.

Then there’s irrational exuberance (or paranoia). If the news is full of cancer stories, Marty is much more likely to suspect a tumor. Alternatively, if the mood of the moment is about toughening up, the pain may be ignored, even when there is a cancerous lump to go with it.

Finally, there’s the issue of trust. While we have organizations ranging from the web-based Angie’s List to the well established Joint Commission whose job it is to rate health care providers, these raters are not independent of the groups they rate. They depend on health care providers for their continued existence, as well as much of the data used to generate ratings.

To make matters worse, providers can game the system, finding out how ratings are generated and manipulating their resources to maximize quality scores without actually maximizing quality (US News and World Report has this problem with colleges). Under the best circumstances this leads to an arms race between raters and providers, squandering resources that might otherwise go to patients. Under slightly less rosy assumptions…well, see Exhibit A again.

The upshot of this analogy is that there are good reasons to believe health care markets will not be “efficient.” That is, unfettered competition will not lead to the best product at the lowest price. Information asymmetries and conflicts of interest leave consumers poorly equipped to act as rational purchasers of health services. Now add to this mix the problem that people making health care purchasing decisions are usually—and sometimes very—sick.

As has come up often in the faux debate surrounding counseling for end of life decision making, individuals facing their last days may judge having just a few more to be a great deal more valuable than they would have a year or two earlier. Similarly, expensive tests may seem well worth the money to those suffering from an unknown ailment, even when the chance they will help is known to be slim. When the tests come back inconclusive and the illness abates on its own, those consumers may be angry, they may not use that doctor again, but they may also be bankrupt.

The point of all this is that we consume health care under a set of circumstances that make “rational” choices unlikely if not impossible. Goldhill makes a good point that health insurance is unlike any other kind of insurance we buy. This is why in most of the developed world they don’t sell it like insurance. They just give it to people and pay for it with tax revenues. That way, consumers don’t have to make decisions they don’t understand at times when they can’t think clearly, and nobody has to die because they can’t afford life saving care.

-Dan Belsky and Brad Wright


Posted by on August 31, 2009 in Uncategorized


2 responses to “Market-Based Health Reform Relies On Rational Consumers Who Don’t Exist

  1. ixat

    October 13, 2009 at 1:36 am

    OK then, my friends… I read that article, was very impressed with the general analysis, but like you, I had doubts about the people's ability to rationally pick care for themselves. What do you think about one of his other ideas, though – that a patient should pay out of pocket for general medical expenses (presumably many of those will get cheaper with the right incentives and price controls), and health insurance would take care of ruinous and catastrophic illnesses?

  2. D. Brad Wright

    October 13, 2009 at 11:32 am

    There's no question that many insurance plans cover "too much" — they are less insurance and more pre-payment. However, I am not in favor of making people spend more out of pocket–at least not lower income people–because there have been studies (famously the RAND health insurance experiment) that have found that more out of pocket spending reduces utilization, but not necessarily in the way that we would hope. That is, people do not make wise decisions about what care they actually need. So they often end up not seeking care they truly need and continuing to seek care they don't need. Will providing more information on quality help with this? Perhaps, but I'm not holding my breath.


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