Third Revised Draft: Please Do Not Quote or Cite Without Permission Bounded Rationality and the Conceptual Underpinnings of Health Policy: A Rationale and Roadmap for Addressing the Challenges of Choice in Medical Settings

The implementation of Medicare Part D illustrates some of the foibles of maximizing the number of choice options in an effort to empower consumers. Findings from research on bounded rationality suggest that people frequently make choices on the basis of decision heuristics that cause them to: (a) ignore relevant information about uncertain prospects, (b) use information in ways that systematically bias their expectations about future events, (c) partition their choices in ways that obscure vital trade-offs, and (d) be perversely influenced and at times adversely affected by expanding their choice options. Yet these findings, along with the early experience with Medicare Part D, appear to be lost on policymakers who continue to rely on expanded choices and more information for consumers as a means to improve program performance. In this paper, we explore both the promise and potential pitfalls of adapting health policy to reflect bounded rationality in consumer choice. We identify some 40 “anomalies” in the literature on consumer behavior in health settings. These suggest that the experience with Medicare Part D is but one example of a more general pattern: that increasing the number of choices or enhancing information about those options often does not yield the expected results. Policies that fail to account for bounded rationality, we argue, are likely to be ineffective and in some cases counterproductive. But to adapt health policies to more directly deal with decision heuristics and the biases they entail, we suggest that reformers must confront three barriers to policy change: lagged learning on the part of policymakers, blame avoidance among elected officials, and concerns about excessive government paternalism in American health care.