“Skin in the game”: The market for high-stakes services

It is a commonplace in public policy that exposing citizens to more price signals for important services is an important part of bringing down costs. In the health care arena, for example, it’s often said that the reason medical costs are so high is that customers by and large are not paying their own bills and don’t even know the costs of the various procedures — if they were the ones who had to pay the difference in price between a brand-name or generic drug, they would be more likely to make the sensible, cost-effective decision.

This theory is completely, 180-degrees wrong. Even if we assume that consumers are rational utility-maximizers, “saving money” is not the relevant utility to maximize in the medical situation — preserving one’s health and, ultimately, one’s life is the priority that overrides all others. Even total financial ruin is preferable to death. Further, in the absence of specialized medical knowledge, it is understandable and even rational to use price as a proxy for effectiveness. Even if there is a point of diminishing returns, that extra little bit of effectiveness may be the decisive factor.

We can see a similar dynamic in other high-stakes scenarios. Higher education is an economic good, but it is an economic good of a very particular type: it permanently affects your long-term economic prospects, and you only get one shot at it. Here again, it is reasonable to use price as a proxy for quality in the absence of other information — and it is likely that the elaborate attempts to generate hard data about learning effectiveness will lead to the unsurprising conclusion that schools with better resources deliver better outcomes! Again, even if there is a point of diminishing returns on the price vs. quality graph, people will want to maximize the quality to the extent possible, in their one chance to go to college. In the choice between thwarted life prospects and unmanageable debt, unmanageable debt surely seems preferable. The analogy with legal services is easy to draw as well — when one’s freedom is at stake, no price is too high.

Once we acknowledge that there is a qualitative difference between high-stakes, life-or-death outcomes and financial outcomes, we should expect people in a private market to drive up costs for high-stakes services at every opportunity — which is in fact what we witness in practice. The only way to control prices is to control prices, i.e., to limit what can be charged for the relevant services either through government regulation, through negotiation on behalf of large groups of customers, or through the creation of a “public option” for the service in question (like public universities in the postwar era).

4 thoughts on ““Skin in the game”: The market for high-stakes services

  1. I’ve had people tell me that their doctor recommended a name brand drug over the generic version on the basis of the effectiveness of the name brand drug, even though they were literally identical. People are extremely eager to believe this, under the assumption that drug development is a market and not a cartel.

  2. If anything, this argument doesn’t go far enough, .When it comes to higher ed, much of the time arguably the goal is prestige rather than learning effectiveness, and cost isn’t just a proxy for prestige, it’s a cause of it.

  3. ” Even total financial ruin is preferable to death.”

    As a pastor, I talk to a lot of people that would rather forego expensive medical treatment, even treatment that might extend their lives, than risk becoming a substantial economic burden on their families. That sort of issue comes up in end-of-life conversations all the time.

  4. Wow. By starting from the terms of this policy trend and “deconstructing” it from within, I somehow managed to completely disregard the fact that people care about others. What a deranged worldview…

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