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Deciphering Health Care’s Irrationality

Posted by John McDonough  August 4, 2013 01:57 PM

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While book endorsements are not a regular feature here, Irrationality in Health Care by Douglas Hough, is worth your attention. It's an introduction to behavioral economics and an application to health care. Books such as Thinking Fast and Slow and Nudge have pushed the field, and Hough's contribution connects the dots to health care. There are plenty of dots, such as:

hough b index.jpg-- Why does the public support specific parts of the Affordable Care Act, though not the overall law containing these provisions?

-- Why is giving consumers lots of choices in their health plans a bad idea?

-- Why do many patients not adhere to their diagnostic and treatment plans?

-- Why will some people give away a valuable asset (think blood or kidney) that they would not sell?

-- Why do physicians keep practicing defensive medicine even in states with malpractice reform?

Hough poses 23 such "anomalies" and uses the tools of behavioral economics to find persuasive answers.

Behavioral economics, first conceptualized in the 1970s, challenges some key premises of mainstream neoclassical economics that endorses free and unfettered markets managed by Adam Smith's "invisible hand" as the most desired state. In the standard formulation, buyers and sellers act rationally in their perceived self-interest to maximize utility based on their fixed preferences. Government's job is to make sure markets are well organized and operated, and then get out the way. Over centuries, pretenders to the throne, including Marxist, rational choice, and other models have unsuccessfully challenged the neoclassical orthodoxy.

Hough identifies three unique contributions from behavioral economics thus far, all with strong implications for health care:

Decision bias: Evidence shows that that most of us regularly make decisions against our own rational self-interest and in predictable ways, for example, by over-estimating our own abilities and predictive powers. Perhaps the most important of these biases is loss aversion; we normally value hypothetical or real losses over hypothetical or real gains. Hence the success of reform opponents over proponents regarding the ACA, especially when large portions of the public believe they will experience losses from the ACA that actually are not in the law.

The power of default: The way choices are organized and presented often have a determinative impact on an individual's decision-making. For example, nations such as France, Hungary, Belgium and Poland have organ donor rates of nearly 100% while nations such as the UK, Germany, and the Netherlands are below 30%. How come? Because the first set automatically registers citizens as organ donors, allowing them to opt-out, while the latter require opt-in. It makes all the difference. That's the reasoning behind the ACA provision requiring employers who offer health insurance to automatically "opt-in" their employees into their health plans.

The power of zero: If I offer a $10 discount off a $20 price, versus a $10 discount off a $10 price, I am going to get a hugely larger volume from the second over the first offer, in spite of the equal dollar benefit. "The price of zero has an extraordinary effect on people's behavior," far beyond rational consideration of benefits, according to Hough. What will be the long-term impact of zero cost-sharing for clinical preventive services such as mammography and other screenings as required by the ACA? We can predict easily that the volume of services will climb, but what other spillover effects will appear?

There is a lot of value in this volume. I will mention one other piece that caught my attention. Hough contrasts the lack of alignment between neoclassical economics and public health, and sees behavioral economics differently:

"...the approach and principles of behavioral economics are much more aligned with those of public health than are those of mainstream economics, and this perspective provides another avenue for modifying or accommodating patient behavior. Unlike neoclassical economics, behavioral economics allows for government intervention for what Professor [George} Lowenstein calls internalities, when a person makes a decision without sufficient understanding of the long-term consequences, due to hyperbolic discounting or overconfidence bias.

"Because of internalities, behavioral economists will support market interventions that would be anathema to mainstream economists. For example, neoclassical economists might admit that obesity is a major social problem but would argue against public involvement in what is primarily an individual decision. Behavioral economists, on the other hand, would note that many obese people express a desire to lose weight but lack the willpower to exercise and limit their calorie intake; in these cases, they would argue that intervention is warranted to provide a nudge, commitment device, or other incentive for the obese person to do what he knows that he needs to do to improve his health."

Hough is appropriately modest about the future of behavioral economics, suggesting that it represents an enhancement and not a replacement for mainstream economic thinking. For time being, it has a vibrant future, and this volume is a fine introduction if you would like to understand the field better.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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About the author

John E. McDonough is a professor of practice at the Harvard School of Public Health. He is the author of the book “Inside National Health Reform”, published in 2011 by More »

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