Six economic theories that drive patient decision-making

To gain a competitive advantage in healthcare, “you must first understand how economic principles and individual biases shape patients’ purchase decisions,” according to Tom McDougal Jr., DSc, MSHA, MBA, FACHE, professor, economics, Department of Healthcare Administration, Samford University, during the recent MGMA webinar “Using Economic Theory to Understand Patient Decisions.”

McDougal highlighted six primary economic theories that drive patient decision-making when purchasing healthcare services: risk aversion, adverse selection, moral hazard, cost theory, agency theory and rational choice theory.

Risk aversion

People are either risk seekers or risk avoiders, and they may react differently depending on the situation. And McDougal is no different: “In terms of my professional activities, I tend to be a risk seeker,” he related. “I tend to seek opportunities to do things different, to do things better. But in my personal life, I'm more of a risk avoider. I like things to be pretty consistent. … I like a routine.”
 
McDougal pointed to millennials as an example of risk aversion in healthcare, in that they are more likely to be uninsured than some older generations. “In essence, they are betting on the fact that they are already healthy” and don’t expect to “to have a lot of healthcare utilization,” McDougal asserted.

Adverse selection

Adverse selection suggests that individuals are apt to purchase a product if they expect to use it more often. Unlike the millennial example above, individuals who think they have a better chance of needing medical care are more likely to purchase health insurance and vice versa.

As McDougal noted, this example has been substantiated by the Affordable Care Act in regard to the individual mandate to purchase health insurance. At the time it was enacted, McDougal held to the fact that the economics weren’t going to work: “…we’re going to have people who believe they need services more likely to purchase; therefore, it’s going to be more expensive for everyone who is participating in the ACA exchanges because we’re not going to have the healthy people purchasing insurance,” he said.

In turn, this created an issue for insurance companies, which not only had to cover their costs but also offer reasonably priced premiums to ensure both the sick and healthy were purchasing insurance. 

Moral hazard

Moral hazard posits that consumers will purchase more of an item if they don’t have to pay full cost for it. Consequently, if patients have a lower copay for a doctor’s visits, they will likely see their physician more often.

As McDougal maintains, moral hazard is a constant in healthcare. “If you have a $35 copay to go to the physician’s office, you are more likely to go if you are suffering from flu symptoms,” McDougal said. “But if you have to pay $110, you would be less likely to go for that office visit.”  

Cost theory

Cost theory falls into two categories: opportunity cost and sunk cost. The former is the money an individual would have spent on something else if he or she didn’t have to purchase an item. For example, what happens if a practice’s X-ray machine breaks down and the practice has to spend $150,000 to replace it? Where would that money have been allocated? “Would you have bought more or newer furniture for your waiting room?” McDougal asked. “We don’t often think about this when we’re considering some of our capital purchases.”

On the other hand, a sunk cost is the money a practice spends on an item that can’t be recouped. These costs should not be evaluated when making long-term decisions regarding a project. Instead, it’s important to consider sensibility and efficiency. Citing the aforementioned X-ray machine example, McDougal said that if it’s in constant need of repair, “you can’t take into consideration what you paid for the X-ray equipment five years ago, 10 years ago or 15 years ago.”

Agency theory

Agency theory is when a purchaser relies on another party to help make a purchase decision or to make a purchase for him or her. In this case, a purchaser would depend on the agent for his or her expertise and to provide accurate information. The purchaser does not typically verify the information; rather, trust is explicitly placed in the agent to decide.

A healthcare-related example would be when a physician refers a patient for an MRI, which may simply be at an imaging center a block away. “We don’t individually go out and evaluate all of our options for where we could have this MRI performed,” McDougal remarked. “We trust the physician’s referral.”

Rational choice theory

Rational choice theory helps patients make decisions when making purchases. In theory, they won’t make a purchase decision until they have enough information concerning all their purchase options. As McDougal conveyed, “We’re assuming that individuals will always make prudent and logical decisions to purchase that provides them with the highest amount of personal utility.”

However, this is not always the case. According to bounded rationality, there’s a limit to the information patients will gather. This can lead to purchasers making decisions based on incomplete information, biases, illogical desires and other factors.