The One Thing Healthcare Lacks that Makes It So Dysfunctional

People making value-sensitive decisions and thereby driving value-improving competition in the book industry! Photo by @thiszun on

If I had to pin down one thing that healthcare lacks that makes it such a dysfunctional industry, this is what it would be: value-sensitive decisions. I throw the term around here and there, but it deserves a little more explanation.

You’ve heard of someone being price sensitive, right? It means price is an important consideration when they are choosing between multiple options.

How about quality sensitive? That means quality is an important consideration when choosing between multiple options.

Everybody is quality sensitive; they don’t want to acquire something that doesn’t fulfill their need.

And people are usually price sensitive. The exception would be when the difference in price between their multiple options is such a tiny percentage of their wealth that it’s deemed insignificant. For example, a wealthy person buying a book on eBay would probably choose the $25.00 “Like New” book rather than the $24.99 “Acceptable” book. The poor college student, on the other hand, may very well get the cheaper one!

Remember, Value = Quality / Price. Therefore, when someone is both quality sensitive and price sensitive, it’s called being value sensitive.

In a normal industry, value-sensitive people buy the option that they deem to have the best mix of quality and price, which is slightly different for every person depending on what aspects of quality are most important to them and how much money they are willing to spend on the thing. These value-sensitive decisions are the engine of competition.

You see, when value-sensitive decisions are taking place in an industry, every company in that industry is trying to deliver the best mix of quality and price because they know that if they succeed at doing that, consumers will choose their product over their competitors’ products, which will enable the company that accomplishes that to reap the biggest share of the profit pie.

Of course, there are different consumer segments with different wants and different amounts of money to spend, but companies are trying to achieve that perfect mix of quality and price for each consumer segment that they’re targeting.

This is the core aspect of a properly functioning market. Without value-sensitive decisions, everything gets distorted. Companies will still fight for the greatest share of the profit pie, but the focus of competition is no longer on overall quality and total price to achieve that. Instead, competition shifts to focus on the aspects of a product that consumers are basing their choices on.

So, bringing this back to healthcare, if a patient has no idea about the relative quality of Hospital A versus Hospital B, they use quality surrogates, such as convenience of parking or how beautiful the lobby is. And if they will only pay a flat copay regardless of the total cost of their hospitalization, they stop caring about relative total price completely.

Think of a scenario where a patient has a flat copay for any in-network hospital. If they have to pay $10 to park at Hospital A, but parking is free at Hospital B, the cost of parking has now become the salient feature upon which they will be basing their assessment of price. And assuming they think both hospitals are of equivalent quality, that parking fee just made Hospital A’s value lower compared to Hospital B, so the patient will choose to go to Hospital B.

Basing a multi-thousand dollar purchase decision that could literally be life or death on a $10 parking fee seems pretty ridiculous, doesn’t it? But this is what our healthcare purchase decisions are relegated to when we do not have the information and incentives necessary to make proper value-sensitive decisions.

Given the sorry state of value-sensitive decisions in our healthcare system, I would argue that it is delivering exactly the overall low value that we should expect. And this is why I focus so much on explaining how we can eliminate our healthcare system’s barriers to value-sensitive decisions.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: