12/16/2019

Mental Transaction Costs

"Perhaps consumers are ignorant about health care prices for a reason. When it comes to relieving pain and suffering, we do not want to take on the task of deciding between treatments based on price. Imagine having to ask yourself how much pain you would be willing to endure to save an addition $500. Or trying to choose between a high-cost treatment that is certain to work and a lower-cost treatment that has only a 75 percent chance of success.

Allowing our treatment choices to be made for us by doctors, with insurance companies in the background negotiating prices and determining what will be covered, saves us on mental transaction costs. We prefer to obtain health care without having to make cost trade-offs.

Having said this, I still believe that our health care system would work better if consumers were aware of prices and had the incentive to make cost-conscious decisions. My point is simply that health care reformers need to acknowledge the importance of mental transaction costs."