Behavioral Economics and Health-Care Markets

This chapter summarizes research in behavioral health economics, focusing on insurance markets and product markets in health care. We argue that the prevalence of choice difficulties and biases leading to mistakes in these markets establish a special place for them in economic analysis. In addition, we argue that while the behavioral health-economics literature has done a better job documenting consumer-choice mistakes in insurance and treatment choices than explaining why those mistakes occur, it is clear that we should not ignore these mistakes in our analyses. We document evidence showing that consumers leave lots of money on the table in their insurance-plan choices, sometimes thousands of dollars. This is true both when consumers make active choices (e.g., they do not have a default plan) and when they make passive choices (e.g., they have a default plan). We discuss the implications of this body of work for the design and regulation of insurance markets, including the interaction between consumer choice difficulties or biases and adverse selection. We then document evidence on consumer mistakes in health-care utilization and treatment choices, especially in response to changes in prices such as copayments and deductibles. We show how choice difficulties or biases may lead patients to respond to such increases in patient cost-sharing by reducing demand for high-value care, muddying the traditional argument that the price elasticity of demand for medical care meaningfully captures the degree of moral hazard. We conclude with directions for future research.