American Journal of Law & Medicine

Beyond Payment and Delivery Reform: The Individual Mandate's Cost-Control Potential

I. INTRODUCTION

In a symposium* 1 focused on healthcare cost control, most of our authors have unsurprisingly highlighted and assessed Obamacare's payment and delivery reforms--the supply-side efforts to decrease costs of medical treatment. (2) But there is another party in healthcare decision-making who is equally or even more important: the patient. The question we will tackle here is whether the individual mandate and its accompanying patient-centered insurance reforms might decrease costs for patients in ways that ought to matter in assessing Obamacare's cost control provisions.

The individual mandate's (3) cost control potential lies in its reduction or even elimination of patients' decision costs. The mandate, together with its minimum coverage requirements and a handful of the statute's substantive insurance reforms, combats demand-side inefficiencies that might arise from patients' bounded rationality. (4) Decisions about whether to buy commercial insurance, how much insurance to buy, whether to consume preventive care, and how much to pay for that care are all difficult decisions. In order to make optimal choices, patients need a lot of information that is costly to obtain and to evaluate. (5) Although patients, left to their own devices, might nevertheless make perfect choices, they likely would balance the costs from less-than-perfect choices with the cognitive costs of discovering optimal choices. Furthermore, even if unregulated patients did invest in optimal decision-making and therefore made perfectly efficient choices, regulation might be able to improve efficiency if the government can make optimal choices for patients at a lower total and average cost. (6)

Obamacare's individual mandate, (7) minimum coverage requirements, (8) elimination of cost-sharing for preventive care, (9) and minimum medical loss ratios (10) work together to decrease patients' decision costs, (11) steering patients to particular choices that Congress deemed most efficient. (12) If those regulations succeed in improving the efficiency of patients' healthcare and insurance choices, then the resulting demand-side forces can help to decrease prices. This brief Essay does not attempt to evaluate the regulations' success; it merely highlights the cost-control implications of Obamcare's demand-side measures, noting that discussions of cost control should not focus exclusively on the statute's supply-side effects.

II. TRIPARTITE DECISION-MAKING AND INFORMATION COSTS

Medical markets involve three important decision-makers: patients, doctors, and payers. (13) Self-insured patients are their own payers, but most American patients rely on third-party payers, either governmental or private insurers. (14) In an unregulated market, patients would need to decide whether to hire a third-party payer to bear the risk of bad medical shocks; (15) they would need to decide which potential shocks to cover through insurance; and they would need to decide how much to pay for that risk-bearing function. They would also need to decide how much control to give their payers over their medical consumption choices, and when their payers did not exercise such control, they would need to decide when, whether, and how much medical treatment to consume. All of these decisions are quite costly to make.

A. INSURANCE CHOICES

On the question of whether to buy insurance in the first place, the patient needs to know how likely it is that she will suffer a bad health shock, and she needs to know whether, in the absence of insurance, she would have enough money to pay for the treatment required when such a shock arose. The probability of a shock depends on complex information about family history, relationship of family history to individual risk, any non-hereditary predispositions to particular health shocks, and environmental and behavioral contributors to risk. (16)

There are three distinct barriers to acquiring and using that information. First, many patients cannot spare the cognitive resources required to access and comprehend the medical information available about health risks. (17) It is more efficient for them to use cognitive resources in other ways because it is usually more costly per unit to do a task one time than it is to do that task one hundred times. (18) Unless a patient is a healthcare or insurance professional, he is likely to find it very costly to make these assessments himself, and he likely would rather spend his cognitive resources on his job, allowing him to make enough money to hire someone else to assess his medical risk.

Second, even the patients who do have the resources required to understand their health risks suffer from cognitive limitations in the form of heuristics and biases (19)--most famously optimism bias (20)--that they must overcome when evaluating their true risks. Overcoming those biases might impose distinct cognitive costs; for example, it might be depressing to make realistic rather than optimistic assessments of one's current health state and future health risks. (21)

Third, medical science does not understand the cause of some health risks, making it impossible to estimate one's individual risk of suffering those shocks any more specifically than population-level incidence. For example, science does not yet know whether lyposarcoma, a particular soft-tissue cancer, is hereditary, environmental, behavioral, or none of the above; (22) all we know is that it is generally rare in humans. (23)

In short, when assessing the actuarial value of insurance for various health risks, the information costs can be extremely high and, for many patients, insurmountable. …

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