Behavioral Economics and Medical Debt: What’s Psychology Got To Do With It?

We all know that medical debt is increasing due to factors such as high deductibles, increasing pharmaceutical and hospital costs, higher insurance premiums, insurance denials, stagnant wages, and overall economic instability. Blame can be laid squarely at the feet of numerous players and the question of paying for medical care becomes less “why won’t this patient pay?” and more “why should they pay?”

Think of it this way: Would you go into your local supermarket and fill up your trolley without knowing what things cost, especially if you’re on a budget? I can’t think of many major purchases a person walks into without knowing exactly what will be owed; even a home construction or renovation project requires the owner’s approval of additional costs before work is completed. Why is healthcare different? Assuming patients are the issue and that they just don’t want to pay or are trying to game the system disavows the seriousness of the problem and shifts the blame from the institutions that are doing the billing directly on to the patient.

The creation of high-deductible health plans was intended to spur greater consumer awareness of healthcare costs and provide the opportunity for shopping around for the best value. It’s laughable, now, to look back on this and think for a moment that it would have worked. It’s impossible to shop for “healthcare value” when your options are limited, your budget is limited, or your insurance rates and denials keep increasing and the costs of actual services are opaque and apparently vary depending on the moon phase and day of the week.

It’s a common refrain: “I got this bill from the hospital, then six weeks later I got another bill from someone else. Then I got something called an ‘explanation of benefits,’ but I don’t know what that’s for. And it looks like the insurance company didn’t cover this procedure, but I thought they were supposed to. The bill is way more than I expected – I can’t pay this.”

It doesn’t make sense that the patient is left to figure out how much their bill is.

Providers are asking patients to pay bills they themselves don’t know are correct or don’t fully understand. Medical billing is saturated with ambiguity, and patients receive multiple bills from different organizations that use different systems in language that is often undecipherable to the average person. Is it any wonder they don’t pay?

Moreover, there’s a lot of psychology going on here. Behavioral economics is one of the clearest lenses for understanding why medical debt becomes so difficult to resolve.

There are several behavioral economics principles that are particularly relevant:

Ambiguity Aversion

In Thinking, Fast and Slow, author Daniel Kahneman states, “A general ‘law of least effort’ applies to cognitive as well as physical exertion.” People are less likely to act when outcomes, costs, or rules feel unclear, and avoidance, the path of least resistance, is a common reaction when someone can’t predict the outcome of a particular engagement. We naturally prefer known risks over unclear ones, even when action would likely improve the outcome. This helps explain why patients avoid bills, abandon payment portals, or ignore calls. They’re just avoiding uncertainty.

Cognitive Load and Decision Paralysis

Behavioral economist Sendhil Mullainathan and psychologist Eldar Shafir exert in their book Scarcity: Why Having Too Little Means So Much that financial stress consumes cognitive bandwidth, or put more elegantly, “scarcity captures the mind.”  A medical bill rarely arrives in isolation. Patients are often simultaneously juggling an illness or injury, caregiving, employment disruptions, transportation issues, and financial stress. Behavioral economics shows us when complexity increases, decision quality and follow-through decrease. That high cognitive load, combined with the sheer number of items that require attention during and after illness or injury meet to cause decision paralysis and inaction.

Present Bias

Humans are really good at prioritizing immediate relief over long-term benefits. Cracking open that bill causes anxiety…shoving it in a drawer provides immediate relief. Present bias dictates that that short-term relief outweighs any painful future consequences. It’s a way to regulate emotional discomfort, if not a very good one.  

Learned Helplessness and Low Perceived Agency

Repeated exposure to opaque systems like healthcare billing creates the notion that bad outcomes are inevitable. Each phone call to the hospital elicits a different response. Bills change unexpectedly. It appears as if the system is uncontrollable. Economists like to call this “reduced perceived efficacy” — why bother trying if nothing will change?

Loss Aversion

Isn’t it weird that sometimes the things you gain don’t seem as meaningful as those you lose? That’s Loss Aversion. We feel losses far more intensely than gains. That’s why traditional collections companies tend to emphasize threats more than the possible benefits of paying off a bill. There’s a limit to what humans can tolerate, though…too much threatening behavior causes us to retreat, disengage, and avoid.

Choice Architecture

It’s not only our internal forces that shape how we react to the billing situation. Economists have shown that environment shapes behavior, and small changes can indeed affect outcomes. Richard Thaler and Cass Sunstein in Nudge assert that complexity and friction reduce participation. If systems reduce uncertainty, use plain language, explain things thoroughly, and simplify decisions, people are far more likely to engage. It makes sense. It’s easier and friendlier to navigate a system that’s been designed for clarity from the get-go. When you do that, you’re removing barriers to engagement and encouraging resolution.

What this means for healthcare

It’s hard to outmaneuver psychology and it’s obvious that a lot of the issues are out of providers’ control. Insurance is gonna insurance, after all. However, the mistake healthcare organizations often make is interpreting patient disengagement as unwillingness to pay. Behavioral economics suggest differently; ambiguity, cognitive overload, and low perceived control all reduce the likelihood of interaction.

What is in providers’ control is optimizing systems for accuracy and patient clarity and realizing that medical debt is not only a financial burden, but also an administrative one. Fragmented systems, ambiguous language, complex processes — all these things are within the providers’ domain. And the bonus is that creating patient-friendly systems not only increases revenue, it also directly increases the likelihood that a patient will NOT leave a bad Google review or TikTok reel. And in this day and age, that alone is worth something.