A. The Presumed Benefits of Choice
Americans are accustomed to an environment that offers unparalleled
choice in all aspects of their consuming behavior. Although it lacks a
Constitutional basis, we tend to regard freedom of consumer choice as a
right, much like freedom of speech or the right to own a gun. We love
choice and believe in it deeply. Considered from the viewpoint of
neoclassical economics, an abundance of choices is highly positive. In
theory, having many competitors vie to provide the best quality goods and
services at the lowest cost in order to win the business of the most
consumers is a key strength of our economy and an assurance of the
public’s satisfaction. In the healthcare context, however, the benefits of
choice are harder to realize. Consumers rarely have the knowledge, ability,
time, or patience to fully explore and understand all their options and make
an optimal decision. Thus, in health care, as in some other technical areas,
an overabundance of choice and the complexity it introduces can lessen
consumers’ ability to make good choices and to engage the force of
competition to constrain price inflation. 73
There is also a significant transaction cost to offering consumers
alternatives and bringing those alternatives to their attention. As an
example, compare the “medical loss ratio” of Medicare with that of private
insurance, meaning how much of each dollar goes to running the insurance
plan as opposed to providing care. Medicare generally operates at a loss
ratio of approximately 97%; that is, roughly 97 cents of every Medicare
dollar go to pay providers for care and only about 3 cents are used for
administrative costs of the program. Historically, the loss ratios of private
insurance plans have been much lower, in the range of 68-88% for
individual coverage, somewhat higher but still below 90% for group
coverage.74 There are many reasons for the higher administrative expenses
73. SUSAN M. FINLEY, THE GREAT AMERICAN RIP-OFF: A CONSUMER’S PERSPECTIVE ON
HEALTHCARE 25 (2007). Psychological studies have shown that having too many choices can
lead to confusion and stress, potentially causing consumers to make worse decisions than
they would have made in a more restricted setting. See, e.g., BARRY SCHWARTZ, THE
PARADOX OF CHOICE: WHY MORE IS LESS 3 (2005), (“. . .there is a cost to having an overload
of choice.”).
74. See, e.g., Health Affairs, Health Policy Brief on Medical Loss Ratios (Nov. 17,
2010), available at http://www.healthaffairs.org/healthpolicybriefs/brief.php?brief_id=31
(last visited Apr. 27, 2015). The ACA, attempting to assure that insurance purchasers get
good value for their money, imposes minimum loss ratios on insurers. Insurers of individuals
and small (less than 100) groups must maintain a loss ratio of at least 80%, while insurers of
larger groups must have a loss ratio of 85% or more. Id. See also http://
www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Market-Reforms/Medical-Loss-Ratio.html. While the medical loss ratio is widely used as a metric to assess the
efficiency and value of a health insurer’s plans, this complex measure must be used carefully
to avoid drawing invalid conclusions about a plan’s worth. See James C. Robinson, Use and
