[cross-posted from the University of Pennsylvania Law School] 

In a new article, University of Pennsylvania Law School Professor Allison Hoffman elucidates a fundamental problem afflicting health care in the United States: policymakers’ stubborn reliance on market-based theories and increased consumer choice to resolve the high spending and relatively poor health outcomes that have become endemic to the system. In “Health Care’s Market Bureaucracy,” forthcoming in the UCLA Law Review, Hoffman closely examines the economic theories underlying market-based health care policies, the empirical evidence demonstrating how such policies have failed in practice, and the regulatory infrastructure that has grown in an attempt to mitigate those failures. Ultimately, “rather than helping people get what they want,” Hoffman finds, “market-based policies produce a maze of obligations and decisions that confuse people and burden them when they are sick.”

Hoffman is an expert on health care law and policy. Her research aims to bring greater descriptive and analytical clarity to the purposes of health regulation and to deepen our understanding of how health insurance design and regulation both reflects and shapes social consciousness around risk.

Since the 1980s, advocates of market-based health care policies have contended they offer two advantages: increased efficiency, and decreased bureaucracy by way of limited government interference. Such policies “are held up as the singular way to honor autonomy and choice,” which “has emerged as a sacred value in health care decisionmaking. 

Indeed, “promises of market choice now pervade all corners of health care,” writes Hoffman. “You can choose your own insurance plan. You can choose your own doctor. You can choose your hospital, imaging center, pharmacy, urgent care facility, lab, and outpatient surgical center. You can choose your own procedures, drugs, and course of treatment. You can get your care at CVS, or in India.”

However, Hoffman explains, the unique challenges of health care make it particularly ill-suited for approaches that rely upon patients’ consumer choices to achieve the best outcomes at a reasonable cost. Several factors contribute to this mismatch. “First, basic assumptions of neoclassic economics, like well-ordered preferences, evade patients,” she writes. “Second, patient consumers experience a range of problems of cognitive biases — from information overload to anchoring to deference — that have proven tough to correct. Finally, even if consumers were perfectly rational beings, the health care markets themselves are also flawed and difficult to mend, so that even when consumers signal clearly and accurately, markets often will not respond in turn.” 

Even when provided with more information, studies have shown that consumers lack the health and financial literacy skills and numeracy to process it. In particular, average consumers “do not understand the technical terms that describe their health insurance policy, how much it costs, and what benefits are covered,” which impedes their ability to select the right plan. 

Accounting for these issues, Hoffman examines how economic theories have translated into three prominent types of market-based policies that have been widely implemented in the United States to improve health care quality or reduce spending: “relying on consumers to choose well among insurance plan options with the hopes that their choices will put pressure on insurers to negotiate better prices and offer better plans,” as the Affordable Care Act health plan exchanges do; “looking to consumers to ration medical care at the point of sale to reduce spending … by putting more of their own spending dollars at stake” through high-deductible health care plans and the use of Health Savings Accounts; and “looking to the tools of antitrust regulation to improve dynamics in larger market competition to drive value.” 

Each of these policies “relies on the theory that markets will achieve the best solution if we can just get the regulation (or deregulation) right,” writes Hoffman. However, “they have all failed to do so, despite tremendous investment of regulatory effort and intellectual capital.” 

 Empirical evidence shows that people do not choose wisely among health plans, and that increased cost-sharing through high-deductible plans and HSAs leads patients to “reduce ‘good’ care as much as wasteful care,” eliminating preventive care and even medications that could produce improved health outcomes. Antitrust law fares no better: “After four decades of enforcement of antitrust law in the health care industry, the provider market is more consolidated than ever, sending prices on a steep upward trajectory without notable increases in quality,” writes Hoffman.

Market-based policies also have not resulted in reduced bureaucracy — to the contrary, “[e]fforts to fix flailing competition-based policies have required armies of health regulators, reams of regulation, and seemingly endless evaluation and adjustment by technocratic experts—to no avail,” she writes.

Nevertheless, market-based policies persist, both because of the elevation of the idea of individual choice by economic theory (and it’s narrow definition in terms of actions in a market), and because such policies allow policymakers and regulators to “avoid dealing with hard normative tradeoffs around how much care we use, who uses it, and how much we pay for it,” Hoffman writes. “Policymakers thus punt decisions that could directly harm the bottom line of the healthcare industry, leaving the dirty work to consumers.”

Based upon the evidence, “[i]t is time to let go of the false hope that market-based solutions will solve U.S. health care woes,” argues Hoffman. “[W]e must take on political challenges and uncomfortable conversations to make real progress on the most intractable health policy problems. But so long as we continue painstakingly to build health care’s market bureaucracy, we are too distracted and too tired to have these conversations… . [W]e must put down the technocratic tools and to turn our collective efforts to building more productive intellectual foundations for the next era of health policy, law, and regulation.”