The Price of Peace of Mind: Why Healthcare Markets Keep Failing Us

 Let's play a quick game.

Option A: I hand you £3,000. No strings. It's yours. Option B: You spin a wheel. 80% chance you walk away with £4,000. 20% chance you walk away with nothing.

Do the maths. Option B is worth £3,200 on average, objectively the better bet. A cold, rational robot picks B every time. So why, when Daniel Kahneman and Amos Tversky ran this exact experiment, did 80% of people pick Option A? (Kahneman and Tversky, 1979)

Because we're not robots. We make decisions based on expected utility, not expected value, and when there's something to gain, we'd rather lock in the sure thing than risk walking away empty-handed. The pain of ending up with nothing hurts way more than the thrill of winning a bit extra. (Flip it around, though, and we go the other way: when we're facing a certain loss, we'll gamble to avoid it, even when the gamble is worse on paper.) (Tversky and Kahneman, 1991)

This one quirk of human psychology is the reason the entire insurance industry exists. We happily hand over a few hundred pounds a month to avoid the nightmare scenario of a £100,000 hospital bill ruining our lives. We're not buying healthcare. We're buying peace of mind.

The US Dilemma: The Death Spiral

So if everyone wants insurance, the market should just… provide it, right?

If only. Insurance markets have a nasty habit of eating themselves alive, and the culprit is something economists call asymmetric information. Translation: one side of the deal knows way more than the other.

You know about your dodgy knee. You know your dad had a heart attack at 52. You know you smoke a pack a day behind the shed. The insurance company? No clue. So it sets premiums based on the average person, and that's where the trouble starts.

Imagine the US insurance market pre-2010, before the Affordable Care Act showed up. An insurer charges you £200 a month based on average health. The healthiest people look at that price and think: "I never go to the doctor. Why am I paying £200 a month?" They drop out. Now the insurer's pool is a bit sicker than it was. Costs go up. Premiums go up. The next-healthiest tier looks at the new price and does the same maths. They drop out too. Rinse and repeat.

This is the premium death spiral, and it's exactly as dramatic as it sounds. Eventually, only the sickest people are left, premiums become astronomical, and the whole market collapses. Good, affordable insurance gets driven out — not because it's bad, but because nobody can tell who's actually sick. (Einav, Finkelstein and Cullen, 2010)

The Adverse Selection Death Spiral

Figure 1: The adverse selection death spiral in voluntary insurance markets

The UK Dilemma: The NHS Queue

"Fine," you might say. "The UK solved this. The NHS is free for everyone. Problem solved."

Not quite. Healthcare economics has this cruel trick where solving one problem just creates another. The NHS killed the death spiral by making healthcare universal, but in doing so, it opened a different door: moral hazard.

Moral hazard is what happens after you're insured. Think about it. If your bike is fully insured against theft, are you really going to triple-check the lock every single night? Probably not. Once you're protected from the downside, your behaviour shifts.

In the NHS, a doctor's visit costs you exactly £0. And when something's free, basic economics says people use more of it. That mildly annoying cough that would've sorted itself out in three days? Might as well book a GP appointment, it's free. That's moral hazard in action.

Now, to be fair, NHS waiting lists aren't just about people over-using the system. Years of underfunding, a knackered workforce, and an ageing population are doing a lot of the heavy lifting here. But when there's no price to filter out the "eh, might as well" appointments from the urgent ones, everyone ends up in the same queue. Instead of rationing by money, the NHS rations by time (Cullis, Jones and Propper, 2000). And somewhere in that queue, behind a dozen minor colds, is someone who genuinely needs to be seen yesterday.

The Nudge We Need

Here's where it gets interesting. Economics doesn't just tell us what's broken, it hands us the toolkit.

Fixing the US death spiral? The ACA tried the obvious move: make insurance mandatory. The individual mandate legally required Americans to buy coverage, dragging healthy people back into the pool and stabilising premiums (Frean, Gruber and Sommers, 2017). Simple, right?

Except in 2019, the Trump administration effectively killed the mandate penalty. And here's the twist: the market didn't implode. ACA marketplace enrollment hit a record 24.3 million in 2025 (KFF, 2025), not because Americans were forced to sign up, but because the government made insurance genuinely affordable through subsidies. Turns out the real fix wasn't the stick; it was the carrot.

Fixing NHS moral hazard? Bring in a small co-payment to make people pause before booking that "just in case" appointment. In France, patients pay about €8 out of pocket for a standard GP visit (the rest is reimbursed (Henshell, 2024)). In Sweden, a GP visit runs 150-300 SEK (£11-22), with an annual cap of around £107 so nobody gets hammered for having a chronic illness. These aren't punishments. They're just enough friction, a speed bump not a toll booth, to make people think twice (Weale and Clark, 2010).

The Bigger Picture

Healthcare is the textbook case of a market that refuses to behave. The invisible hand gets tangled in information gaps, behavioural quirks, and hidden costs. Both the US and the UK have been trying to fix this for decades, and neither has fully cracked it.

But that's kind of the point. Once you see healthcare through the lens of expected utility, asymmetric information, and moral hazard, the headlines start making more sense. The premium hikes. The waiting lists. The political fights over mandates and co-payments. They're not random dysfunction, they're predictable outcomes of deeply human behaviour meeting imperfect markets.

We don't need perfect markets. We just need smarter ones.

Labels: uncertainty, asymmetric information, adverse selection, moral hazard, behavioural economics, market failure, decision-making under uncertainty

References:

Cullis, J.G., Jones, P.R. and Propper, C. (2000) “Chapter 23 Waiting lists and medical treatment: Analysis and policies,” Handbook of Health Economics, pp. 1201–1249. Available at: https://doi.org/10.1016/s1574-0064(00)80036-0.

Countries covered by the HSPM platform (2020) OBS. Available at: https://eurohealthobservatory.who.int/monitors/health-systems-monitor/countries-hspm/hspm/sweden-2023/financing/out-of-pocket-payments

Einav, L., Finkelstein, A. and Cullen, M.R. (2010) “Estimating Welfare in Insurance Markets Using Variation in Prices^*,” Quarterly Journal of Economics, 125(3), pp. 877–921. Available at: https://doi.org/10.1162/qjec.2010.125.3.877.

Frean, M., Gruber, J. and Sommers, B.D. (2017) “Premium subsidies, the mandate, and Medicaid expansion: Coverage effects of the Affordable Care Act,” Journal of Health Economics, 53, pp. 72–86. Available at: https://doi.org/10.1016/j.jhealeco.2017.02.004.

Henshell, R. (2024) Patients to pay more for doctor visits in France from May 15, connexionfrance. Available at: https://www.connexionfrance.com/news/patients-to-pay-more-for-doctor-visits-in-france-from-may-15/653530.

Kahneman, D. and Tversky, A. (1979) “Prospect Theory: An Analysis of Decision under Risk,” Econometrica, 47(2), p. 263. Available at: https://doi.org/10.2307/1914185.

KFF (2025) ACA Marketplace Enrollment Hits Another Record High During 2025 Open Enrollment Period, KFF. Available at: https://www.kff.org/affordable-care-act/enrollment-growth-in-the-aca-marketplaces/

“The Effect of Eliminating the Individual Mandate Penalty and the Role of Behavioral Factors” (2018) Commonwealthfund.org [Preprint]. Available at: https://www.commonwealthfund.org/publications/fund-reports/2018/jul/eliminating-individual-mandate-penalty-behavioral-factors

Tversky, A. and Kahneman, D. (1991) “Loss Aversion in Riskless Choice: A Reference-Dependent Model,” The Quarterly Journal of Economics, 106(4), pp. 1039–1061. Available at: https://doi.org/10.2307/2937956.

Weale, A. and Clark, S. (2010) “Co-payments in the NHS: an analysis of the normative arguments,” Health Economics, Policy and Law, 5(2), pp. 225–246. Available at: https://doi.org/10.1017/s1744133109990211.