Behavioral Economics and Health Care

1. Behavioral Economics and Health Care Rachel Cerkovnik November 30th, 2009 The Important Role that Incentives Could Play, and Where the Reform bill is Lacking

2. Agenda • Misaligned incentives work against optimum consumption of health care • Patients • Providers • Effect of proposed health care reform • Addresses access issues within insurance market • Problem with health care reform • Does not address patient or provider incentives and behavior • Models for incentive-minded reform • HSAs – pros and cons; would require much system reform, • Fee for Service reform – depends heavily on system and management innovation

3. Conflicting Patient Behavioral Incentives • Complexity and lacking information/transparency prevents rational decision-making • Moral hazard causes overconsumption • Psychology of now vs. later judgments lead to underconsumption • This means that consumers need help determining how to optimize their investments in health care. • Current efforts address underconsumption issues (e.g. subsidized preventative care) • Ability to pay complicates addressing moral hazard

4. Complexity of Health Care Decisions • Normal market theory assumes consumers have adequate information and make rational decisions • Analysis by behavioral economists shows that people generally lack the ability to accurately: • Predict probabilities of future medical needs • Assess probabilities rationally (people fail to distinguish significantly between 5% and 20%, but draw great distinction between 1% and 0%. • Perform exponential discounting (hyperbolic discounting instead) • Assess utility for medical states • Estimate how strongly good or bad outcomes will affect their happiness

5. Consumer Decision to Purchase Insurance • Price = Avg. Expected Claims + Admin + Profit • Risk averse consumers are willing to purchase anyway • Individuals with high risk will purchase more insurance than those with low-risk • Calculate financial consequences of all possible illness, weighted by probability of illness, to compute an Expected Utility for a given insurance plan • Complications: • Individuals do not have identical probabilities • Illnesses do not have identical treatment plans and outcomes • Financial costs are hard to find and vary greatly, as does quality

6. Moral Hazard • Those covered by employer group plans don’t choose their insurers and don’t pay their providers; they are distanced from the financial consequences of their healthcare decisions and become passive consumers. • Many people also do not realize that benefits are coming out of their salaries, and that negotiating for better plans will reduce wages. • No penalty exists for unhealthy lifestyle choices, and no benefit rewards health-conscious efforts, which represent an important component of preventative care. • For those who do realize that health benefits represent a significant part of workers’ salaries, the more they use this benefit, the more “value” they capture.

7. Underconsumption of Health Care? • Hyperbolic discounting - people underinvest in immediate costs to produce future benefits (e.g. retirement savings, preventative care, insurance). • Procrastination • Reflects policy need for inspiring inertia or utilizing status quo bias • Liquidity constraints (the inability to borrow against future income) • For young people, why invest limited income in future needs – will be making more by the time expensive care is needed • Avoidance of negative outcomes, death denial (e.g. middle-aged men refuse annual checkups) • Psychology • Discomfort and inconvenience also discourage people from seeking high-value care

8. Misaligned Incentives: Providers • Fee for Service payment system • Unclear guidelines for treatment • Lagging interest in outcomes/efficiency research • These issues, combined with a culture of defining quality by technology rather than efficiency, has lead to over-treatment being common practice. • Over-treatment is well-evidenced by the lack of correlation between outcomes and cost (e.g. Gawande)

9. Fee for Service Providers are paid more for providing more; quality and efficiency are not rewarded. Guaranteed payment prevents cost from being an issue – why not run additional tests? Fear of malpractice suits may influence doctors to over-treat as a display of prudence. Financial stake in clinic profits or specialist referrals raise ethical concerns.

10. Reform of Fee Model - Example • Blue Cross Blue Shield of Massachusetts deal with Caritas Christi Health Care System (60,000 members) and Tufts (47,000 patients) • Attempt to combat rapidly escalating costs of near-universal health coverage • Hospitals earn more by keeping patients healthy • Attempt to reduce estimated 30% of care that is unnecessary • Also hope to improve coordination of care • Incentive for provider = chance to profit • Quality incentive = bonus for meeting health targets

11. Medical Guidelines • Some medical treatment areas have straightforward guidelines • There is little variation in physician practice in these areas • Other treatment areas provide less guidance, and allow for more physician interpretation • There is a wide-range of practices in these areas • Many conservative treatment styles yield positive outcomes equal to those achieved by more extravagant treatment • Insurers have difficulty in negotiating in areas which take power and independence away from physicians

12. Professional Application of Efficiency Research • Hard to overcome professional norms • Problem of supply driving demand (regions with over-represented specialists perform more specialized procedures) • Fee for service is a big hurdle • When pushed hard, best practices can be widely adopted. Incentives help. • Gawande, The Checklist • Doctors’ professional judgment is a difficult political obstacle to overcome.

13. Effect of Proposed Health Care Reform • Improve insurance affordability • Premium and cost-sharing subsides • Create national plan to compete with private insurers • Decrease the number of uninsured Americans • Individual and employer mandates • Low-income subsidies • Remove access barriers • Subsidies • Guarantee issue • Community rating • Increase administrative efficiency.

14. Problem with Health Care Reform • Does not address misaligned incentives, which cause overuse (30% of care unnecessary) • Patients not empowered • Providers benefit from more insured patients, but incentives have not been created to promote efficiency, and discourage unnecessary care. • Mandate does not address all reasons for uninsured (e.g. inertia, complexity, status quo bias). • Solution: automatically enroll, and allow opt-out of default for those with liquidity constraints

15. Strategies to Realign Incentives • HSAs – Health Savings Accounts • HSAs require consumers to take responsibility for their health care choices, by utilizing more traditional catastrophic insurance – BUT, we see these are difficult decisions to ask consumers to make • FFS – Fee for Service Reform (Capitation) • Reforming the way providers are paid forces provider systems to innovate towards more efficient treatment – BUT, quality is a concern, and moral hazard remains. • Status Quo Bias • To encourage “good” decisions, opt-out provisions are useful – BUT, is this too forceful? • Subsidies • When properly aligned with behavioral impulses, subsidies could help move consumption towards efficient levels – BUT, these are extremely complex areas, and require intense research.

16. Could Subsidies Produce Socially Efficient Consumption of Health Care? RR – demand curve of rational, well-informed consumer DD – demand curve of everyman SS social cost II no subsidy TT tax subsidy Qe efficient

17. Sources Liebman, Jeffrey; Zeckhauser, Richard. “Simple Humans, Complex Insurance, Subtle Subsidies”, National Bureau of Economic Research, September 2008. Martinez, Barbara. “Insurer Aims to Alter Health-Care Fee Model”. Wall Street Journal. November 27, 2009. Ehrbeck, Packard. “Will Consumer-Driven Health Care Take Off?” NIHCM Foundation. May 2005. Fendrick, Chernow. “Value Based Insurance Design”. NIHCM Foundation. June 2009. Hibbard, Judith. “Engaging Consumers in Quality Issues”. NIHCM Foundation. October 2005. Aaron, Henry; Burman, Leonard. “Using Taxes to Reform Health Insurance”. Brookings, Washington D.C. 2008.