Fixing The Affordable Care Act Requires Us To Ignore The Sunk Cost Fallacy

Over the weekend I was amused listening to the Plant Money podcast, Dear Economist, I Need A Date.  On the show they had the economist and author, Tim Harford, using economic theory to give love advice. While chuckling at his advice I was struck with the idea that most of the proposed fixes to the Affordable Care Act requires us to ignore the Sunk Cost Fallacy. For those who are unfamiliar with the concept of the Sunk Cost Fallacy, here is a nice synopsis from The Skeptic’s Dictionary.

When one makes a hopeless investment, one sometimes reasons: I can’t stop now, otherwise what I’ve invested so far will be lost. This is true, of course, but irrelevant to whether one should continue to invest in the project. Everything one has invested is lost regardless. If there is no hope for success in the future from the investment, then the fact that one has already lost a bundle should lead one to the conclusion that the rational thing to do is to withdraw from the project.

To continue to invest in a hopeless project is irrational. Such behavior may be a pathetic attempt to delay having to face the consequences of one’s poor judgment. The irrationality is a way to save face, to appear to be knowledgeable, when in fact one is acting like an idiot.

The Affordable Care Act supporters and a majority of the people in the United States would like the Affordable Care Act to be fixed despite the fact that most of them acknowledge that the website and those narrow network insurance plans look like hopeless investments. The idea that we cannot keep our existing health care system of doctors and insurance plans with these new plans begs the question whether this investment has no hope for success even with additional tweaks. The problem is simple. I can understand why insurance companies want me as a healthy person to buy their plans. I do not understand why I should. If we remember one of the important characteristics of health care expenditures in the United States, half of all health care costs in the US is concentrated in only 5% of the population. If you are not part of that 5% and you are financially disciplined, the odds of you being successful with self-insurance is pretty good. All you are doing is copying the same plan the insurance companies are using to pay for the 5%. The high cost of the ACA insurance premiums becomes  a very powerful incentive for self-insuring. If you are successful with your self-insured health care plan, you get to keep the rewards.The Sunked Cost Fallacy reminds us that it  is irrational to continue to invest your money into the Affordable Care Act web site and health care plans and hope that things will get better. Here is an old graph from the Kaiser Family Foundation for you to ponder.