Beyond the Nudge: Behavioral Economics and Health Insurance George Loewenstein Carnegie Mellon University Bhargava & Loewenstein 2015. Behavioral Economics and Public Policy: Beyond Nudging. American Economic Review, Paper & Proceedings
• In 2003 two groups of behavioral economists proposed an approach to public policy (based on idea of Matthew Rabin) • We called it “Regulation for Conservatives” and “Libertarian Paternalism” in part to secure support across the political spectrum Conservatives (who oppose more substantive interventions), such as David Brooks and David Cameron, have become biggest supporters… Camerer, C., Issacharoff, S. Loewenstein, G., O'Donoghue, T. & Rabin, M. (2003). Regulation for Conservatives: Behavioral Economics and the Case for "Asymmetric Paternalism" University of Pennsylvania Law Review, 1151(3), 1211-1254. Sunstein, C.R. and Thaler, R.H. (2003). "Behavioral Economics, Public Policy, and Paternalism: Libertarian Paternalism". American Economic Review, Papers and Proceedings, 93(2): 175 – 179.
Much of the thrust of Behavioral Economics on public policy has taken the form of ’nudges’ “A nudge, as we will use the term, is any aspect “I am very optimistic about the of the choice architecture that alters people’s future of that work [referring to behavior in a predictable way without forbidding nudges], which is any options or significantly changing their characterized by achieving economic incentives. To count as a mere medium-sized gains by nano- sized investments .” nudge, the intervention must be easy and cheap to avoid .“ Daniel Kahneman; in The Thaler and Sunstein, Nudge Daily Beast Nudge success stories – e.g., .. • saving (Madrian & Shea 2001; Thaler & Benartzi 2004) • medicine adherence (Volpp et al. 2011) • parental school choice (Hasting and Weinstein 2008) • efficiency of home energy use (Alcott 2011)
I’ve, personally, been doing lots of nudge - related research.. Loewenstein, G., Brennan, T. & Volpp, K.G. (2007). Asymmetric paternalism to improve health behaviors. Journal of the American Medical Association. 298(20), 2415-2417. Wisdom, J., Downs, J. & Loewenstein, G. (2009). Promoting Healthy Choices: Information vs. Convenience. American Economic Journal: Applied, 99(2), 159-64. Keller, P.A., Harlam, B., Loewenstein, G. & Volpp, K.G. (2011). Enhanced active choice: a new method to motivate behavior change. Journal of Consumer Psychology, 21(4), 376-383. Jue, J.J., Press, M.J, McDonald, D., Volpp, K. Asch, D.A., Mitra, N., Stanowski, A.C. & Loewenstein, G. (2012). The impact of price discounts and calorie messaging on beverage consumption: a multi-site field study. Preventive Medicine, 55, 629-533. Downs, J. S., Wisdom, J., Wansink, B., & Loewenstein, G. (2013). Supplementing Menu Labeling With Calorie Recommendations to Test for Facilitation Effects. American Journal of Public Health, 103(9), 1604-1609. Long, J.A., Jahnle, E.C., Richardson, D.M., Loewenstein, G. & Volpp, K.G. (2012). A Randomized Controlled Trial of Peer Mentoring and Financial Incentive to Improve Glucose Control in African American Veterans. Annals of Internal Medicine. 156, 416-424. Halpern, S.D., Loewenstein, G., Volpp, K.G., Cooney, E., Vranas, K. Quill, C.M., McKenzie, M.S., Harhay, M.O., Gabler, N.B., Silva, T. Arnold, R., Angus, D.C., & Bryce, C. (2013). Default Options In Advance Directives Influence How Patients Set Goals For End-Of-Life Care. Health Affairs, 32(2). Gopalan, A., Tahirovic, E., Moss, H., Troxel, A.B., Zhu, J., Loewenstein, G. & Volpp, K.G. (forthcoming). Translating the hemoglobin A1C with more easily understood feedback: A Randomized Controlled Trial. Journal of General Internal Medicine. Downs, J.S., Wisdom, J. & Loewenstein, G. (forthcoming). Helping Consumers Use Nutrition Information: Effects of Format and Presentation. American Journal of Health Economics. Loewenstein, G., Bryce, C., Hagmann, D. and Rajpal, S. (forthcoming). Warning: You Are About to be Nudged. Behavioral Science & Policy but have been having misgivings..
Are nudges band aides? • Bad policies/structural problems abound – e.g., subsidizing corn (and hence corn oil and syrup) – tax-protected saving system that disproportionately benefits the affluent, who already save enough – Pay doctors fee for service, then encourage patients to engage in healthier behaviors • Nudges typically focus on individual shortcomings – e.g., present-bias -- as the source of problems, which may have unintended consequences such as: – blaming the individual for problems that are structural (e.g., obesity, low savings) – not focusing on true underlying causes • Nudges tend to be ‘ nano- sized’ when more substantial interventions are often called for to deal with gargantuan problems – e.g., – Income inequality – Climate change – Social and economic challenges caused by new technologies • Nudges may even give policy makers an excuse for not acting – palliatives when surgery is needed Need to continue to integrate insights from psychology, but move beyond nudges ; embrace more substantial policies Today: Illustrate these points with case of health insurance
Typical health care plans…
• Clearly, a lot of thought went into designing these plans • Designers wanted to incentivize subscribers to behave in specific ways • But,… – After at least an hour of scrutiny one person with a PhD in economics couldn’t figure out.. • what the fundamental differences were between the plans. • how one should behave differently depending on which plan one chose.
Recent research supports these concerns.. Loewenstein, G., Friedman, J.F., McGill, B., Ahmad, S., Beshears, J., Choi, J., Kolstad, J., Laibson, D., Madrian, B., List, J., Volpp, K.G. (2013). Consumers’ Misunderstanding of Health Insurance. Journal of Health Economics. 32:850 – 862 • Two surveys with representative samples of U.S. individuals who had private health insurance • Tested mastery of health insurance concepts and ability to compute costs
Quick primer on health insurance • Premium: Plan payment (typically deducted from paycheck each month) • Cost-sharing features: ‒ Deductible: Expenses that must be paid out-of-pocket before coverage kicks in ‒ Copayment: Payment for each visit to the doctor or specialist ‒ Coinsurance: Share of costs for medical services covered by insurer after deductible is met ‒ Out-of-Pocket Maximum: Total cap on out-of-pocket spending after deductible • Many other important features – e.g., physician networks
Self-perceived and actual comprehension of insurance cost-sharing concepts (5-response multiple choice items; p of guessing correctly = 20%) 14% Concept % who believe they know % answering correctly answered Deductible 97% 78% all 4 Copay 100% 72% multiple choice Coinsurance 57% 34% questions Maximum out-of-pocket 93% 55% correctly Next, presented them with a very simplified representation of a traditional insurance plan and asked them to compute what they would pay for services
Given their lack of understanding of health insurance, do people make sensible choice between the plans they are offered? • Study with major US Health Retailer - Fortune 100 company ($100B+ revenue) - Over 200,000 employees - 50,000+ benefit eligible employees • Micro-Data on plan choice and spend - employee demographics - medical claims (including counterfactual claims) - plan choice data (PY 2009 to 2012) • Plan Enrollment - One month open enrollment (April or May) on online interface - Plan coverage for June 1 to May 31 st of following year - Employees cannot change elections outside this period • We focus on employees with single coverage (employee only) Bhargava & Loewenstein (forthcoming) Choosing a Health Plan: Complexity and Consequences Journal of the American Medical Association . Bhargava, Loewenstein & Sydnor (under revision, Quarterly Journal of Economics ). Choose to Lose? Employee Health-Plan Decisions from a Menu with Dominated Options.
Key feature of decision • Most of the plans employees could choose were dominated – i.e., entailed higher costs regardless of medical usage Decision provides a clean litmus test of consumer rationality
Comprehension Check Imagine a person who has a choice between two simple health insurance plans. Plan A has a monthly premium of $150 and a deductible of $1000 Plan B has a monthly premium of $100 and a deductible of $1500 These plans cover all costs after the deductible is met with no copay or coinsurance. Which of the following do you think is correct? • The person should definitely choose Plan A • The person should definitely choose Plan B • If the person expects to have very high health costs he should probably choose Plan A • If the person expects to have very high health costs he should probably choose Plan B
Evolution of the firm’s health -insurance offerings Primary focus for today We presented our findings to them
Open Enrollment Interface
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