Consumer-Centric Health: Models for Change '11

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Behavioral Economics Meet Healthcare October 2011

Tom Weakland – Enterprise Strategy & Conversion, Health Industries Advisory

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What is Behavioral Economics?

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Behavioral Economics is the application of neo-classical economics and psychology to explain irrational* behavior

• People are rational and driven by self-interest

• People make decisions which maximize their own economic utility

• Assumptions break down when humans do not consider decisions in unemotional, strictly rational terms

• Decision-making is affected by environmental influences

• Provides explanations as to why people’s decisions differ from classical economic predictions

+

• Identifies common “shortcuts” used in consumer decision-making

• Explains external variables affecting consumer decision-making

• Explains market inefficiencies

• Offers insights into product design and marketing

*Behavior not predicted by traditional economic theory (typically attributable to cognitive biases, limitations in knowledge/cognitive ability, or psychological / environmental factors)

Neoclassical Economics

Cognitive Psychology

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Behavioral economic principles can be classified into four broad categories

• 1.1 Relative Choices

• 1.2 Reliance on Defaults

• 1.3 Attribute Priming

• 1.4 Mental Accounting • 1.5 Framing 1. Decision

Short-cuts 2. Value

Assessments

4. Emotional Impacts

3. Social Impacts

Behavioral Economics – Our Framework

• 2.1 Love of Free

• 2.2 Anchoring

• 2.3 Endowment Effect

• 2.4 Hyperbolic Discounting

• 4.1 Loss Aversion

• 4.2 Self-Herding

• 4.3 Self-Control Facilitation

• 4.4 Hot vs. Cold States

• 4.5 Overconfidence Effect

• 4.6 Risk Aversion

• 3.1 Social/Financial

Domains

• 3.2 Dishonesty Effect

• 3.3 Signaling

• 3.4 Bandwagon Effect

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Behavioral Economics - Cross-Industry Behavioral Economics Perspective – 1. Decision Shortcuts

Defaults

0

20

40

60

80

100

% O

rg

an

Do

no

rs

Organ Donation by Country

Lower Percentage of Organ Donors

Higher Percentage of Organ Donors

Retirement Research Consortium, August 2008

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Relative Choices

Is This Expensive?

Signature 6 Burner BBQ

$5,984.05

1Predictably Irrational, Dan Ariely

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Relative Choices

Behavioral Economics Principles

Is This Expensive?

Signature 6 Burner BBQ

$5,984.05

$6,299.00

1Predictably Irrational, Dan Ariely

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Relative Choices

Behavioral Economics Principles

Is This Expensive?

Signature 6 Burner BBQ

$5,984.05

$12,500.00

$6,299.00

1Predictably Irrational, Dan Ariely

Signature 6 Burner BBQ: Gold Plated Edition

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Love of Free

Behavioral Economics Principles

1Bloomberg Businessweek, Stone 2010

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Love of Free

Behavioral Economics Principles

Prime members increase purchases by 150% and account for 20% of all

Amazon purchases1

1Bloomberg Businessweek, Stone 2010

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Why is Behavioral Economics Relevant to Healthcare?

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Poor Behavior and Choice is a Rampant Problem

• 3 in 4 Americans do not take their prescribed medications as directed

• No show rates for doctor’s appointments are 20-30%

• 34% of US adults over 20 years old are obese

• Over the past 30 years, the number of overweight children has doubled and the number of overweight teenagers has tripled

• Diabetes prevalence has increased by 33% in the in the past 20 years

• 1 out of 3 children born today will develop diabetes at some point in their lifetime if dietary trends continue

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Poor Behavior and Choice Costs Money

• Healthier diets could prevent over $70 billion per year in medical costs, lost productivity, and lost lives – USDA

• In 2008 the direct medical costs of obesity was $148 billion (and unchecked will rise to $344 billion in 2018) - CDC

• Prescription non compliance costs ~ $290 billion per year

• Missed Doctor visits cost over $150 billion per year

• Inappropriate ED visits (by insured) costs up to $10 billion per year

• State and federal governments spend one thousand times more to treat disease than to prevent it ($1,390 vs. $1.21 per person each year) - CDC

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Poor Behavior and Choice Kills

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

453, 377

Smoking

434,395

Weight

135, 375

Alcohol,

Accidents,

Suicide

46,013

Unprotected Sex

Homicide

Drugs

Source: Personal Decisions are the Leading Cause of Death – Ralph L. Keeney, 2008

~2.4 M

Deaths

~1.3 M

Deaths

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10-20% Movement = Billions in Opportunity

$45B

$60B $30B

$45B

Patient Steerage

Drug Adherence

Disease Management

Missed Appointments

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Does this really work?

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Reducing Unnecessary ED Visits

• 10-20% of all ED visits are classified as non-urgent

• The cost to the healthcare system is $6 - $20 billion per year

• Universal coverage does not appear to be the answer

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Reducing Unnecessary ED Visits

Issue

• Unusually high rate of Emergency Department visits by Medicaid members

Hypothesis – ED visits can be reduced through

• Proactive outreach to members immediately following an ED visit

• Ensuring members know how to reach their primary medical provider

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Reducing Unnecessary ED Visits

5 month pilot program launched in Evansville, IN with ~10,000 Medicaid members

593

479

0

100

200

300

400

500

600

700

Monthly Visits Prior to Test Monthly Visits During Test

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Relative Choices

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Loss Aversion

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What does the future hold?

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More prevalence of Behavioral Economics in Healthcare

• As a means to “steer” consumers to specific treatment regimens

• As a way to reduce / control costs

• As a way to influence personal choice

• As a means to enhance population health initiatives

• As a differentiator for Health Insurance Exchange participants

• …