The Burden of Deciding for Yourself: The Disutility Caused by Out-of-Pocket Healthcare Spending

Abstract

As part of a larger "consumer-directed healthcare movement," cost-sharing mechanisms, such as copays and deductibles, cause patients to pay out of pocket for a portion of the costs of the healthcare they consume. Cost sharing is intended to reduce costs by changing consumption behavior, and it has been shown to be an effective though incomplete solution to the problem of unsustainable cost growth. It is controversial nonetheless. This Essay distinguishes three different normative problems with cost sharing (including underinsurance, deterrence of high-value care, and a tax on sickness), which can all be fixed through more precision in the design of cost-sharing mechanisms.

This Essay provides the first sustained investigation of a fourth problem, "the decisional burden." By setting aside the three foregoing problems and then carefully specifying two alternative counterfactual situations in which cost-sharing obligations are removed, the analyst can precisely identify the remaining causal impacts of cost sharing, namely: a subjective disutility experienced by patients when navigating a difficult, and potentially unwanted, choice amongst a complex set of options, requiring tradeoffs between health and wealth. Several concepts from the behavioral sciences -- cognitive capacity, choice overload, sunk costs, and regret -- shed light on this problem. This Essay reviews select portions of that literature and concludes that the decisional burden is a real disadvantage of using patient cost sharing as a mechanism for rationing healthcare. Advocates of cost sharing must bite this bullet.

Keywords: Cost-sharing, behavioral economics, judgment and decision making, health insurance, healthcare, rationing

JEL Classification: I1