Journal of Scholarly Perspectives

The primary market-based approach to reining in health care costs is generally referred to in policy discussions as “consumer directed health care” (“CDHC”). The simple idea underlying CDHC is that patients will demand less care if they are burdened with a greater responsibility for paying the actual cost of that care than is common in our current system, in which costs are largely borne by public or private health insurance with little patient cost sharing. CDHC implicitly relies on the “rational choice” assumption of neoclassical economics that, given the proper incentive structure, individual consumers will allocate resources between medical care and other goods and services (and, within the category of medical care, between competing treatment options) in a manner that maximizes their “subjective expected utility” (“SEU”). As I explain below, there are compelling reasons to believe, however, that most consumers, as boundedly rational decisionmakers, would be particularly bad at making efficient trade-offs when asked to make point-of-service medical care decisions.

This Article describes a novel, “choice architecture” approach that can help individuals to more optimally allocate their resources between medical care and other goods and services. Under this approach, the government would produce and dispense information concerning the costs and benefits of medical treatments sufficient to enable consumers and health insurers to contract for what I call “relative value health insurance” (“RVHI”), a product that covers medical interventions that meet or exceed a given level of cost-effectiveness.