November 3, 2006 5:25PM

And Maybe That’s Just Not a Problem…

Earlier, Michael Cannon blogged about a recent discussion between him and Harvard's David Cutler on the health outcome effects of increasing consumers' price sensitivity for the costs of their care. (Translation: Have consumers deal directly with some of the costs of their care, using such mechanisms as co-pays, HSAs, etc.)

Cutler worries that increasing consumers' price sensitivity will worsen Americans' overall health. Though heightened price sensitivity has the positive effect of reducing the use of expensive health care of dubious value, it also reduces consumer use of health care that is of value — an outcome supported by the landmark Rand Health Insurance Experiment. The undesirable result, Cutler says, is worse health outcomes.

Cannon responds that a broader use of price-sensitivity mechanisms would invoke supply-side market responses such as lower prices. The undesirable result of worse health outcomes may thus be avoided (and, perhaps, better outcomes might result).

In following this discussion, I have a question: Is worse health outcomes necessarily undesirable, especially in this circumstance?

The value of having consumers deal directly with some of the costs of their care is not simply because doing so will reduce the use of dubious health care. The real value is that it increases consumers' appreciation of the costs and benefits of their care and allows them to decide the tradeoffs between those costs and benefits.

Suppose an extremely expensive treatment would provide a consumer with a modest, but very real, positive health outcome. Some consumers may quite rationally choose to put their money toward other uses (ranging from necessities to a "Last Holiday"). On the "health outcome" measure, that decision would be a negative one, but on the "overall welfare" measure, that would be a positive.

Under a zero-price-sensitivity health care model, consumers wouldn't have that choice. They would have already paid for their health care through their insurance premium (or worse, elected to forgo insurance because the premium was too expensive), and so any health care benefit they could receive under their health plan would be "use it or lose it." So why not take the expensive treatment that yields modest results? Whereas, in a sensitivity model, consumers could quite rationally elect to keep their co-payments and HSA money in some situations.

This is not to say that people are wrong to worry about worse health outcomes, or about consumers making questionable choices. But the worriers do have an intellectual IOU outstanding: Do worse health outcomes necessarily mean worse welfare, if consumers can put their health care money toward other uses?

Better health outcomes are preferable to worse outcomes ceteris paribus. But, with price sensitivity mechanisms like co-pays and HSAs, the ceteris isn't paribus. (My apologies to Latinists).