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The Myth of the Rational Health Care Consumer

08/28/2014 11:24 am ET | Updated Oct 28, 2014

Economist Uwe Reinhardt recently argued in the The New York Times that medical education is a private vs. a public good, and therefore may not merit federal (or presumably state) funding.

Reinhardt approaches the debate as an interesting theoretical exercise, a matter of correctly applying existing textbook definitions from the social science of economics, and an exam question that helps him get the grade curve he's looking for in his undergraduate economics classes at Princeton.

But his freshman students who get it "wrong" may have a better real-world grasp on the topic than their esteemed professor. They intuitively get what he misses: Health care is not a typical commodity, and human approaches to health care do not follow standard economic modeling.

Public vs. Private Goods

Economists generally categorize goods into two types -- public and private. Public goods are defined as "nonrival," meaning a person can use it without reducing its use by others, and "non-excludable," meaning individuals cannot be excluded from using the good. Reinhardt gives the example of street lighting.

Private goods are defined as rival and excludable, and private markets are generally assumed to operate under several conditions: First, buyers and sellers are rational; second, perfect information is available; and third, no one player can affect market behavior due to the large number of buyers and sellers involved.

By those definitions, health care is neither a public good nor a private good operating in a perfect market. Too frequently, economists modeling health care fail to understand that markets around health care do not behave rationally, and health care consumers rarely possess perfect information with which to make purchasing decisions.

Imperfect Market in Illness...

In a rational model of health care, the consumer must have the ability to distinguish bad products from good, and must have enough information and emotional distance to make purely rational choices about their or their loved ones' health care.

There are a number of reasons this simply is not the case: Consumers rarely possess the knowledge and ability to determine the best option for their care ("perfect information"). This significant knowledge gap is enough to skew the rational model. But there's much more.

Illness creates an immediate inequality in the consumer equation because it engenders a desperate need to find the "right" solution and to find it now -- immediately and without delay. Imagine how automobile markets would react if all car buyers were suddenly desperate, fearful, and determined to have the most powerful car possible, and to have it today, no matter the cost? Illness precludes the emotional distance needed to make a rational decision. The buyer who is ill -- or whose loved one is ill -- does not perceive a market of many sellers competing for his business, but sees the one emergency room from which he wants the best, most immediate care.

...And in Health

And consumers consistently demonstrate irrational behavior even when overseeing their own routine health care expenditures. When people are obliged to pay for more of their care, the rational economic model predicts they will become more prudent and more informed consumers, and in fact some do. But, as a recent briefing from the Economic Policy Institute discusses, evidence shows that most simply postpone preventive care, thereby waiting until they develop serious conditions that require acute -- and very costly -- care.

In effect, people exchange a $10,000 cost for a $1 million one, gambling that the big one doesn't come. And when they lose the gamble (because most of us will at some point or another), people are then desperate for any care that is perceived to be effective, no matter the cost, and they need it right now. To extend the auto analogy, it's like driving your car mile after mile, never changing the oil, or windshield wipers, or engine belts, or timing belts, until the car fully fails. Then being desperate to obtain an entire engine replacement, immediately, right now, while there are thousands of other drivers in line for the same thing.

If we want to see markets react even more irrationally around this, we should follow Reinhardt's prescription: decrease support for the training of health care providers and shoulder those providers with enormous personal costs for education, malpractice coverage, and so on.

A Better Approach

Instead, I would argue we need to define a third category of goods, perhaps "private goods in imperfect markets," into which health care would more readily fit. Then our government would have an important role to play in minimizing the imperfections of that market.

The real solution is to introduce greater rationality around the distribution of and access to health care, which will require cogent nationwide health care planning, more rational management of our health care workforce (as noted in the recent Institute of Medicine report, "Graduate Medical Education That Meets the Nation's Health Needs"), and an increased supply of providers using clearer and uniform care plans and verifiable delivery metrics. Add in incentives for preventive care and we will begin to see real improvements.