Mainstream economics assumes everyone is rational. Behavioral Economics (BE) does not. People often act irrationality.

Based in psychology, BE is one tool to look at decision making in healthcare.

From insurance to your own health, how you ask a question, frame a question, results in a different answer.

Mandates (eg…Obamacare) tend to fail, while defaults often help us overcome our tendency to not invest in the future- whether for retirement, or a future healthcare issue.


Alan Pitt: Good morning, this is Alan Pitt from Healthcare Pittstop. I’m here with Dr. Doug Hough from Johns Hopkins University. He’s an expert in behavioral economics. He has a wonderful book on the subject. We’re going to talk a bit about that, and he’s also going to give us a context of how behavioral economics may help us get to value in healthcare. I’m really looking forward to the conversation. Dr. Hough, can you tell me a little bit about your work and about your book as well?

Douglas Hough: Oh, sure. Thanks, Alan, it’s a pleasure to be here. Let me just start out saying that I started out almost 50 years ago. I wanted to be an economist because I thought it was just a great way of looking at the world. For the longest time, I used pretty much mainstream economics in my work. Mainstream economics assumes that everybody is rational: Buyers are rational, sellers are rational, everybody’s rational. They may occasionally make mistakes, but if they do, they’re kind of random.

DH: And it wasn’t until I got to Hopkins, almost 20 years ago, and I was teaching Health Economics to my students in a part-time MBA program. These were pretty much practitioners; the average age of the students was about 40. I had full professors from the School of Medicine at Hopkins in my classroom. I would teach the standard economics—the standard health economics—and the students would say, “Well, okay. I guess it must be right because you’re the faculty member, but it just doesn’t seem right.”

DH: I started reading some things on behavioral economics, and I started introducing those in my class. The students just loved it. They said, “Yeah, yeah, yeah. That’s what my patients think about. That’s what many of my colleagues do. So, tell us more about this behavioral economics.” And then, well, I started to become a behavioral economist.

DH: The key distinction between standard economics and behavioral economics is that behavioral economics no longer assumes that people always act rationally. They don’t always act in their own best interest. As a result, we can now frame issues and look at issues related to patient behavior, related to physician behavior, and no longer be stuck in this straitjacket of thinking that patients and physicians will always act rationally. Now, it’s not that they will act irrationally, but they may not act in this strictly logical way that standard economists think.

AP: Yeah. There are obviously a lot of examples, but for instance, I know that patients come to see doctors all the time and they want something done for their issue, but something like 25% of prescriptions go unfilled. Nobody ever picks them up. They get the prescription, they walk away. I never quite understood that. Just a brief history of behavioral economics—where did it come from?

DH: Actually, it came from psychology. The founders of behavioral economics, ironically enough, are Daniel Kahneman from Princeton University and Amos Tversky, who was from Stanford. These two guys did a lot of work on behavioral economics when they were in Israel, and when they moved to the US, they were working together for decades. The insights that they came up in the 1970s and 1980s really set the stage for what we now know as behavioral economics. That’s where it started; it started in psychology. I would guess that 70% of what we call behavioral economics, we just stole from psychology. So in a sense, we ought to be talking more about behavioral science as opposed to behavioral economics.

AP: I noticed from your book, entitled Irrationality in Health Care: What Behavioral Economics Reveals About What We Do and Why, it could have been called, Irrational Rationality in Health Care. There are so many examples that just don’t make sense on the surface, but if you had a framework to explain this, it would make it much better. Do you believe that behavioral economics is the end-all, be-all? Or is it just a tool that we can use to help us? Where does that stand?

DH: Yes—and here’s where we have to be careful. Behavioral economics has really become the trend these days. Lots of people are talking about it. Michael Lewis, who wrote Moneyball and Liar’s Poker, he wrote a book about Daniel Kahneman and Amos Tversky. So people are getting really, really excited about this, which is good on the one hand, but it’s bad in that now a lot of people are thinking that behavioral economics is the magic bullet. It really isn’t.

DH: When I give presentations, one of the things I do is quote Murray Gelman, who is a physicist, a Nobel Prize-winning physicist, who said, “Think how hard physics would be if particles could think.” What we have here in economics and in the real world is particles that think. We have patients and physicians who think. As a result, it’s often difficult to predict exactly what they’re going to be doing. So, as a long answer to your short question, we really need to think about behavioral economics as one tool—but only one tool—to help us look at what’s going on in healthcare to try to come up with some interesting recommendations.

AP: Well, let’s take an example that everybody’s pretty familiar with. How about insurance and the response to Obamacare and insurance? Does behavioral economics have anything to say about that?

DH: Yes, in a couple of ways. That’s a good question, about insurance and Obamacare. People really didn’t like Obamacare for a whole bunch of reasons. They didn’t even like the concept of it. Yet as they were asked, “Well, do you like this provision? Do you like that provision? Do you like that provision?”, they pretty much liked most of the provisions of Obamacare, but they just didn’t like the whole the idea. In part, that was because how the opponents of Obamacare framed the issue—that it was going to take away choice, that it meant that you were no longer going to be able to use your physician and go to what hospital you wanted to go to.

DH: One the interesting things that Barack Obama did was use behavioral economics, at least implicitly, in trying to sell the program. He used a concept called “loss aversion,” which describes how people hate to lose. Not only do people hate to lose, they really, really, really, really hate to lose. So one of the things he said, if you remember in the debate, was, “If you like your current health insurance program, you can keep it.” What he was trying to tell people was, “Don’t worry, we’re not going to take away your health insurance plan if you like your health insurance plan.” That was an important framing device.

DH: You’ve also got the issue of healthy people, young millennials, who just didn’t want health insurance because they didn’t see what the impact or the effect of it was going to be. After all, they saw themselves as paying all of these premiums and getting nothing for it. As a result, they were engaged in something called “hyperbolic discount,” which is that people prefer the present to the future. They prefer things now as opposed the things in the future. In fact, they really, really, really, really prefer things now as compared to things in the future. So what they were seeing was that they were paying these premiums and getting essentially nothing for it.

AP: Because they couldn’t recognize that benefit for 10, 20 years, when they were actually sick.

DH: Exactly right.

AP: So Obama was trying to show “You weren’t going to lose anything,” but he was still faced with this hyperbolic reasoning, this, “Now-versus-future” reasoning. It really led to a very dramatic reluctance of many people to enroll. Do you see a way that we’ll ever get out of this quagmire of health insurance, given some of these issues?

DH: First of all, behavioral economics is not going to be able to solve all of that, but the concepts of behavioral economics do lead to some interesting alternatives to Obamacare. In my personal opinion, if, instead of mandating health insurance, they used a default of health insurance, I think it would have been much better. Let me tell you what I mean by “default,” if I can.

DH: One of the things that Richard Thaler and Cass Sunstein found in their work, in their book Nudge, is that defaults are incredibly powerful. What they meant by that is that many times, you have to start somewhere. Either people have insurance or they don’t have insurance. We have a current default—you don’t have insurance, and so you have to make a decision to go buy insurance. Well, suppose Obamacare had been set up so that everyone is enrolled in a health insurance plan and it would be very easy for them to unenroll. All they would have to do would be to go on a website, check a box, sign their name, and they no longer had health insurance. What the research on defaults has shown is that many people will stay with the default, so many people would have just accepted that they now have health insurance.

AP: Where would you put it the default? Would you put the default in my taxes? Where would you put it that people were okay with that?

DH: Well, you would tell people, “You now have health insurance. We have enrolled you in the fill-in-the-blank plan. If you want to change that plan from Blue Cross Blue Shield to United Healthcare or Aetna, all you have to do is go on this website and change that. Or if you don’t want insurance at all, and click a box that says, ‘I no longer want health insurance.’” What would most likely happen, given the other results on defaults, is that probably 95% of people would keep their health insurance.

AP: But we have a large percentage of people in the US who have no health insurance. They’re the self-pay, working poor, whatever category you want to call it. How do we get those people as a default to have health insurance? Do we put it, because we’re not touching their incomes a lot of times. They’re working day-to-day, different things, how do we make them default to insurance—to participate?

DH: Well, you can say, “You now have health insurance, and here is what the premium is. If you cannot afford this premium, click this box, and we will talk with you about potential subsidies that you could have for your health insurance. So, if a $1,000 a month is too expensive for you, click a box, and then we’ll arrange a phone call where you will reveal to us what your tax return is. Then we will say, ‘Based on what your adjusted gross income is, we can give you a discount of the following amount…’ “

AP: So, you’d roll it into taxes? Like you do for the military.

DH: Yes. Or like you do for Medicaid.

AP: Yes. So it would roll into their taxes. It would probably be something of a sliding scale, you’d figure that out.

DH: Exactly.

AP: I want to continue this conversation. I want to turn a little bit more to some issues at the bedside. So, I hope you’ll be willing to come back and give me a few minutes, and we’ll talk through this just a little bit more.

DH: That sounds great.