[Ed. Note: On Friday, May 2 and Saturday, May 3, 2014, the Petrie-Flom Center hosted its 2014 annual conference: “Behavioral Economics, Law, and Health Policy.” This is the first installment in our series of live blog posts from the event; video will be available later in the summer on our website.]
Alan M. Garber is Harvard’s provost, and both an economist and a physician by training. He holds appointments in the medical school, the faculty of arts and sciences, the school of government, and the school of public health. [Perhaps I should have just listed the colleges that haven’t yet given him an appointment?] I’ll mostly just paraphrase Garber’s talk, and sparsely add my own comments in brackets [as I just did].
Garber’s talk is focused on the Affordable Care Act, and says that it has two purposes: expand access to care, and reduce the costs of care. The latter is particularly important, given the way healthcare is impinging on the larger United States economy.
Garber says that he wasn’t involved in drafting the ACA, but was involved in other large-scale reform proposals. [You can find his pre-ACA views here.] Garber says that the core features of the ACA (e.g., an individual mandate) are typical of virtually any major reform proposal. But the details matter, and the execution in particular is essential.
According to Garber, as long as you have choice among plans, the first issue to grapple with is adverse selection. The problem is that the sickest individuals will choose the most generous plans. The individuals have private information, not available to the insurers. Avoiding this death spiral was a primary purpose of the ACA.
Garber says that the second major problem has to deal with cost more directly: moral hazard. If a product is subsidized, people will buy more than they otherwise would. As long as individuals are not bearing the full cost, individuals will over-consume. The classic economic solution is to put economic incentives on individuals to change their behaviors. Indeed, this is the primary reason for the growth of high deductible health plans in our economy.
Garber explains how copayments can be effective in reducing consumption, but they may backfire by causing patients to overreact, declining even healthcare that they need. Garber says that because of evidence showing such a phenomenon, most people do not think that traditional cost sharing is the solution now. [I’m not sure I would agree with that reading of the literature; there are still lots of economists that like to focus on the fact that very few studies have shown that cost-sharing has adverse effects on median patients. Here’s Swartz’s review of the literature.]
Instead, Garber suggests that it may be more sensible to put the financial incentives on the providers instead, and he is citing the RAND study with managed care organizations. That solution, however, raises concerns that it may be too effective, as providers may provide too-little care when that is their incentive.
Garber is transitioning to ask how all this relates to behavioral economics, the topic of this conference. He notes that the penalty attached to the individual mandate in Massachusetts was very small in relation to the cost of the health insurance premium, but it nonetheless caused many people to sign up. Traditional economics cannot explain this. Rather there was a public campaign that made people think that getting insurance is part of what it means to be a good citizen. It is a form of social pressure. [Of course, social pressure can be incorporated into traditional economic models, as it imposes a disutility on those who would instead free ride. But it is not a simple dollar-and-cents calculation, and traditional economics has no explanation as to why individuals should experience that social pressure as a disutility.]
Garber is now discussing physician incentives, and explaining that professional norms and recognition have tended to be more powerful in changing behavior than financial incentives. [Still, there is lots of data that physicians respond to incentives too.]
In closing, Garber is noting that fairly small tweaks in choice architecture – making it easy to do the right thing – can have profound impacts. For example, take a complex disease like diabetes. If you can create therapies that are very easy to follow – unlike taking multiple insulin injections per day — you can get very powerful results. If you make the right thing easier to do, it will be adopted.
Garber says that it is unclear whether the Affordable Care Act will survive the change in presidential administrations [and the assault by the judiciary in cases like Halbig]. But it may have engendered a conversation that is thoughtful about what kind of healthcare and healthcare system we may want.