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Behavior economics principles offer guidelines to health care reform

Following the recent retraction of the American Health Care Act, two researchers propose four general principles from behavioral economics as guidelines for any future attempt at health care reform. The principles may help to keep currently insured individuals and households from discontinuing their insurance.

“The behavioral economics approach cannot solve all of the problems facing U.S. health care. But behavioral principles can inform approaches to help ensure that insurance markets do not unravel, which is the first and most important challenge of any ‘repeal and replace’ efforts,” Jonathan S. Skinner, PhD, from the Dartmouth-Hitchcock Medical Center, New Hampshire, and Kevin G. Volpp, MD, PhD, from the University of Pennsylvania, wrote. “Coupled with other approaches to reduce costs, behavioral reform could provide some needed optimism for 2017: Lower health insurance premiums for the first time in recent memory.”

According to Skinner and Volpp, there are two types of incentives to encourage healthy individuals to sign up for health insurance: enticing rewards and penalties. However, the first principle from behavioral economics suggests that the enticing factor does not work nearly as well as the penalty. In the case of the American Care Act, the enticing factor was refundable tax credits, while the mandate acted as a penalty. However, if a penalty is too small or too far in the future to be of concern, it can fail.

The second principle involves instant gratification and has important implications for the continuous coverage requirement in the AHCA. Under this requirement, individuals who did not purchase insurance coverage or let current coverage lapse would be subject to a 30% penalty to sign up initially or again. This penalty is unlikely to incentivize young, healthy individuals into purchasing insurance.

The third principle involves maintaining enrollment through inertia. By creating an automatic, annual renewal system for those currently covered by ACA plans in which opting out would cut subsidy returns, people could have a bias toward holding on to their plan due to a sense of loss from giving up federal subsidies.

Any proposal that would lead to higher out-of-pocket premiums, however, could lead to substantial disenrollment. One proposition to alleviate higher premiums is to move high-cost patients into a high-risk pool separate from the larger population of healthy individuals. Unfortunately, this system would only function with a dedicated revenue source.

The fourth principle involves salience of taxation. According to Skinner and Volpp, creating new taxes to pay for health insurance subsidies would be far more politically and economically complicated compared with shifting high-cost patients into an existing plan, such as Medicare. If chronically ill patients not currently covered under the Medicare program could be shifted, combined with currently proposed tax credits, out-of-pocket premiums could decline for many older patients.

“While placing additional pressures on the Medicare Trust Fund, this idea would yield a further cost-saving bonus for enrollees and the federal government: Because inpatient private insurance reimbursements are 75% higher than Medicare reimbursements, the overall health care spending would immediately decline,” Skinner and Volpp wrote. “Most importantly, insurance premiums for everyone else also would decline immediately as the most expensive chronically ill patients are moved off private plans and into Medicare.” – by Talitha Bennett

Disclosures: Skinner reports no relevant financial disclosures. Volpp reports receiving research funding from CVS, Humana, Hawaii Medical Services Association, Weight Watchers and Vitality (Discovery-South Africa); and is a partner in the behavioral economics consulting firm VAL Health.