Wednesday, May 4, 2011

Rational Cosumers

Paul Ryan’s budget has been on my mind mostly because I keep hearing supporters and pundits claiming that privatizing Medicare will unleash the forces of competition thus driving down premiums.  Apart from the fact that we have seen no evidence of that happening in the existing private medical insurance markets, the argument’s basic assumption is that consumers will make rational buying decisions.  That simply is not true.
Our mailbox was stuffed with ads, flyers and detailed monographs touting Medicare Advantage and supplemental insurance plans a few years ago as I approached the magic age.  I consider myself a reasonably sophisticated buyer.  I am able to read most financial reports.  I understand the basics of economic theory.  But the materials in our mailbox were almost impossible to fully comprehend or compare.  Extravagant promises  made in cover letters were shredded by dozens of limitations and exceptions in the small print.  Terms and conditions varied between companies not only by what they said but also by the words used to say them so that comparisons were difficult to make.  I did work up a few spread sheets to do what I could to compare a few plans, but in the end I simply trusted the Church Pension Fund to be more interested in my welfare than any of the other sources.  That was my rational decision.  
More likely than not, the vast majority of buyers would simply throw up their hands and be persuaded by whatever piece of advertising appealed most to them, or, if they were lucky, by an insurance agent who proved to be trustworthy.  Economic rationality based on analysis and understanding would have little to do with it.
The Ryan proposal does more than transfer costs from the collective purchasing power of all retired persons represented by the existing Medicare program to the individual purchasing power of irrational buyers.  Whether intentionally or not, it sets up the conditions under which funds that would otherwise be dedicated to health care will be dedicated to marketing and bureaucratic overhead (including those wonderful top end salaries).  In other words, it’s a rip-off.
All of this reminds me of the 1970s when the idea of consumer rationality was touted by a number of economists.  Coming out of one presentation I thought how good it felt to hear someone give a little credit to consumers about their ability to make rational choices.  I was not a pawn in a corporate game of chess. I was a decision maker to whom sellers had to cater because my decisions were what kept them in business.  There is some truth to that in the local market place of small retailers and service providers.  In the larger world of major corporations it is not true.  It took me several years to recognize that the whole theory of rationality, as presented, was little more than a gigantic con in which the marks were softened up with flattery to give buyers the illusion of making sound purchasing decisions that were, in reality, heavily influenced by skillful marketing.

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