For good behavior

Would you become an organ donor if it were the default option on your driver's license? How about contribute to a retirement plan if your employer automatically enrolled you in one? Or consume less energy if a light in your home glowed red when you cranked up the heat?

Research indicates that you would.

All of these are examples of behavioral economics—in which social behaviors and human emotions influence economic choices. Popularized by recent bestselling books Nudge, Freakonomics and Predictably Irrational, behavioral economics is a hot area of study. And it's captivating retailers, employers, insurance companies and even high-ranking officials in the Obama administration.

Now, the obesity crisis, skyrocketing costs and errors, waste and inefficiencies in the healthcare system are promoting experimentation with behavioral incentives on a nationwide scale. How successful the disparate efforts will be remains to be seen.

The biggest test of how well behavioral economics can be applied to healthcare is the new federal health reform law, which contains in its more than 1,000 pages many opportunities to nudge people toward better health choices.

“There's definitely a general fascination about this area,” said Alan Garber, an internal medicine physician and professor of medicine and economics at Stanford University. “In healthcare, for years and years and years there's been an interest in changing provider and consumer behavior.”

What's new is that money is flowing into research on behavioral economics, and the government is getting involved, Garber and others said. Over the next five years, the government will put behavioral economics into practice on a large scale through the Patient Protection and Affordable Care Act.

Several high-ranking officials in the Obama administration are strong proponents of behavioral economics. Cass Sunstein, co-author of Nudge, is now the administrator of the White House Office of Information and Regulatory Affairs. Peter Orszag, director of the White House Office of Management and Budget, has spoken about the promise of behavioral economics to control costs.

But some worry that behavioral economics could exacerbate health disparities, or inadvertently punish the elderly or people who suffer from chronic diseases.

Meanwhile, some employers are moving full-force to apply behavioral economics to benefit-package design in order to cut healthcare costs.

The most obvious example of behavioral economics in the new healthcare law—and one that drew fire from chronic-disease groups—is a change in employer wellness program incentives. Starting in 2014, employers can offer workers rewards worth up to 30% to 50% of their cost of health coverage for participating in a wellness program and meeting health benchmarks. The law also sets up a 10-state pilot program for similar wellness initiatives on the individual insurance market.

The idea is to create more incentives for workers than is allowed by law today to improve their health, and thus lower medical costs for everyone. The large incentives were pioneered by the grocery chain Safeway.

But the American Diabetes Association, the AARP and other groups have criticized the enhanced incentives, saying that they could penalize those with chronic diseases by forcing them to pay more for healthcare.

“Our position hasn't changed,” said Colleen Fogarty, spokeswoman for the American Diabetes Association, in an e-mail. “We remain opposed to the language, but it is now the law and we have to work to ensure that these provisions do not have a harmful or unfair impact on people with chronic diseases.”

Proponents of the provision say it is a good example of a component of behavioral economics called “choice architecture.” Essentially, choice architecture is organizing choices in such a way that influences people's decisions. In theory, enhanced wellness program incentives allow employers to encourage workers to make the healthiest choices.

“The idea that we make decisions free of any external influences is patently untrue,” Garber said. “The key to choice architecture is that it does not necessarily mean fewer choices; it is about making them easier to choose.”

Choice architecture is sure to be hugely influential in how the government structures new health insurance exchanges, set to go online in 2014, Garber said. While the government won't be able to pick favorites among insurers participating in the state-run exchanges, it will be able give customers information about the plans, using transparency measures. This has already been done through the Medicare Part D prescription drug program, which lets insurers compete on the Medicare website for business.

The individual mandate, where everyone will be required to carry health insurance or pay a penalty, is another example of choice architecture. The mandate also begins in 2014, under the health reform law, with the penalties gradually increasing year-over-year. People will be able to choose a health plan or pay a penalty.

The ideal balance between incentives and penalties are unknown, and there is the danger of going overboard.

“Behavioral incentives can be powerful, but they are unlikely to overcome a powerful financial incentive,” Garber said. So, for some people, an expensive healthcare plan they have to pay for in monthly premiums could be less appealing than a once-a-year financial penalty.

The dangers of financial penalties in healthcare have been shown time and time again when examining prescription drug use. If copayments go up too high, then some people stop filling their prescriptions and wind up sicker.

On the other hand, financial incentives don't always work to change behavior, as evidenced by the disappointing results in physician pay-for-performance programs.

“We'll be seeing some interesting experiments unfolding over the next few years,” Garber said. “This will, in the end, play out in the market.”

Carrots and sticks

The private sector is taking a great interest in behavioral economics.

One small employer in Illinois with just 360 covered lives has embraced these concepts since 2007. Council 31 of the American Federation of State County and Municipal Employees, a labor union representing workers throughout Illinois, incorporated behavioral economics into its plan design for its own employees, spouses and dependents.

The way it works at Council 31 is employees have two options: the standard plan, with typical PPO benefits and copayments, or the much more generous health improvement plan. The standard plan costs workers about 3% of their salary while the health improvement plan is free for employees and 1.5% of their salary for spousal (or same-sex domestic partner) coverage.

While that sounds like a clear choice, the health improvement plan has a lot of requirements. First, participants must sign a two-page contract, which lays out the ground rules: They must have a primary-care physician. They must complete a health-risk assessment, biometric screening and a health learning course annually. Health learning includes topics such as how to prepare for a physician visit and conduct self-exams. If, through these screenings, the employee or spouse is flagged for health intervention, they must participate in and complete relevant programs. If a nurse from the employer's contracting agency reaches out to a worker, he or she must talk to the nurse and comply with any recommended interventions.

To be clear, the employees don't have to improve their health, they just have to participate. So, if you are a smoker, you have to at least try to quit.

“We're using behavioral economics to incentivize people to improve their health,” said Hank Scheff, director of research and employee benefits at AFSCME Council 31. “We try and tailor this to the individual. ... It's a great platform that you can add to.”

Implementation of this program, Scheff said, was bumpy. Still, in the first year 90% of adults signed up. Today, about 95% are in the health improvement plan. Also unusual about these benefits is that each adult in the household must sign up separately. So, the employee could choose the standard plan, while the spouse could choose the health improvement plan. All covered children are automatically enrolled in the cheaper health improvement plan but aren't compelled to meet the requirements.

Prior to 2007, the union was seeing steady double-digit increases in medical claims. (It is self-insured, with a provider network through Blue Cross and Blue Shield of Illinois.) But since implementation in January 2007, paid claims have been flat, and are below 2006 levels, Scheff said. With four years of health assessment data from workers, the union also is starting to see movement in risk factors such as smoking, weight loss and cholesterol. More than 40% of smokers reported that they have quit.

Still, it hasn't worked for everyone. In the first year, four people were removed from the health improvement plan because they failed to participate in screenings.

“We're not trying to play gotcha,” Scheff said. “Where we have trouble with people is that they don't do the program, they procrastinate. We say, either make the commitment or not. It's your choice.”

Perhaps most important to AFSCME is that employees are more active participants in their health, said Ray Werntz, senior consultant at HPN WorldWide, which worked to develop the program with AFSCME.

“What we make clear is we want people to deeply engage in their health,” Werntz said.

The healthcare system is rife with waste, and Scheff said employers can do more to help patients improve it. “Why not do this from the bottom up?” he said. “Making better patients will put pressure on providers to change.”

Cheryl Larson, vice president at the Chicago-based Midwest Business Group on Health, a regional employers group, said that many employers are missing an opportunity to change workers' behavior. “We need to look at what benefits employees are using, and if they are not using it, why not,” she said.

Focusing on what works

Employers are using carrots (incentives) and sticks (penalties) and doing lots of experiments to see what works, Larson added. But she cautioned employers to tread carefully. “As exciting as behavioral economics is, we need to focus on what works now,” Larson said.

Automatic opt-in for 401(k) retirement plans is the classic example of an effective use of behavioral economics. If you eliminate the procrastination element, more people will participate. But Larson says healthcare is far different from personal finance. “It's perceived to be invasive to be opted into a health program based on health status,” she said.

Employers are keen on moving forward with implementation of these programs because of the possibility of lowering healthcare costs.

Express Scripts, a St. Louis-based pharmacy benefit manager, in 2008 launched the Center for Cost-Effective Consumerism and hired experts in behavioral economics—including Garber at Stanford University—to its advisory board.

Individual behavior related to prescription drugs, such as forgetfulness and procrastination, costs $163 billion annually in wasteful spending, according to Express Scripts. The company says it has saved clients $790 million by using behavior-changing tools to get people to switch to generic and lower-cost drug equivalents.

Express Scripts is investing heavily in this area of study because it sees the cost benefits, said Bob Nease, chief scientist at Express Scripts. “It's not a panacea, it's not a silver bullet, but it is definitely a new set of tools,” he said.

Lowe's, the home-improvement retail chain, saved $5.2 million in 2009 by getting employees who take maintenance prescription medications to switch to home pharmacy delivery. It did it using behavioral economics. Bob Ihrie, senior vice president of employee rewards and services at Lowe's Cos., describes the method as “carrot, carrot, stick, big stick.”

Lowe's started by educating its 225,000 employees nationwide about home drug delivery, and the cost savings involved. After the third month, if workers hadn't switched, they are notified at the pharmacy when picking up their prescription and told that if they don't switch to home delivery, they would start paying the full price of the prescription. The next month, if they hadn't signed on for home delivery, they paid full price at the in-store pharmacy.

Another carrot followed. Last September, about 22,000 employees who were not signed on for home delivery received a postcard from Lowe's informing them that if they select home delivery, their prescription drug would be free the first month. About 10% responded to this incentive, Ihrie said.

At the end of 2009, nearly 38,000 workers had switched to home delivery, up about 160% from 14,500 in 2008. Then came the big stick. Starting in January, employees eligible for home delivery but not yet enrolled pay twice the retail price for the drug in store. “We are still waiting to see the outcome of this,” Ihrie said.

The program has worked by breaking the cycle of procrastination, Ihrie said. “We give them choices upfront and then gradually move them along a path that is more mandatory,” he said. Conducted in partnership with Express Scripts, the program cuts waste out of the system without affecting clinical outcomes, Ihrie said.

Express Scripts has a program for employers that requires workers to sign up for mail-order pharmacy delivery, but it is not as popular as the Lowe's model, which today has 200 employer clients, Nease said.

The pervasiveness of procrastination and lack of attention in the population is striking, Nease said. “It's very difficult for humans to spend much time on decisionmaking,” he said. “People want to do the right thing, but they don't have time in the day. Pharmacy benefit management rarely makes it on the list.”

The pharmacy home delivery business is but a fraction of total healthcare spending. What about pursuing the big-ticket items, like the obesity crisis?

Transparency can help people make healthier choices, some studies suggest. In New York, which has required restaurants to post calorie information since 2008, Starbucks patrons consumed 6% fewer calories than customers in Boston and Philadelphia, according to a study by researchers at the Stanford University Graduate School of Business.

Under the new health reform law, chain restaurants and food products in vending machines will be required to have nutritional contents posted for each item starting next year.

Applying behavioral economics to fight the obesity crisis is fairly new, says Kelly Brownell, director of the Rudd Center for Food Policy and Obesity at Yale University. Prior to 2008, the main policy approach to obesity in Washington was educating people and encouraging personal responsibility, Brownell said in a March paper in Health Affairs. “The hope was that people would understand the dangers in their lifestyle choices and behave differently,” Brownell wrote. “Government's role became that of exhortative mentor, promoting improved health habits and publicizing the dangers of obesity but little more.”

First lady Michelle Obama's childhood anti-obesity initiative Let's Move is a prime example of the government's shift from mentor to behavior-changer. The initiative calls for consumer-friendly labels on the front of food packages; tax incentives to draw healthy grocers to low-income neighborhoods; and a partnership with the American Academy of Pediatrics to get physicians to monitor children's body mass index and provide nutrition counseling as part of routine checkups.

There's a fine line between a “nanny” state, where government is taking away decisions, and choice architecture, where the government is providing a set of choices and encouraging people to make the healthiest ones, behavioral economists said.

Take Santa Clara County, Calif., which last month banned toys in fast-food meals. Under the so-called “Happy Meal” ordinance, restaurants cannot use toys to promote meals with more than 485 calories. The ban doesn't pass muster among behavioral economics because they see it as a trade-off (between toy and fries) rather than a true choice.

A nudge, according to Richard Thaler, a co- author of the book Nudge, is “some feature in the environment that attracts our attention and changes our behavior without us doing much of anything.”

The Obama administration appears to be conscious of this fine line between nudges and straight-up strong-arming. The Community Living Assistance Services and Supports Act shows where it is trying to find this balance. The CLASS Act is a voluntary, national insurance program aimed at keeping the elderly in their homes. It is another part of the new federal health law and starts in 2011.

Under the program, employers will automatically enroll workers into the CLASS contribution program, similar to a 401(k) plan. Employees can opt out. Employers then make monthly payroll deductions toward premiums, placed in a “life independence account,” and administered by HHS. Cash benefits, once needed, will be no less than $50 a day, based on the degree of disability or impairment. The cash can be used for nonmedical services and support to maintain community residence but cannot be used to pay for institutional care. There's a five-year vesting period before benefits will be paid out, so 2017 is the first year the money will be available.

The goal is for Americans to have some resources set aside for home healthcare when they need it. The Congressional Budget Office estimates that the CLASS Act will reduce the federal deficit by $70.2 billion over 10 years, based on an average monthly premium of $123 and a daily cash benefit of $75 for life.

It remains to be seen whether this program will be effective in controlling healthcare costs, or keeping some people out of nursing homes. But proponents of behavioral economics are encouraged by these latest actions by government and employers.

“When I'm out talking about pharmacy benefits, I regularly get asked about other applications,” Nease said. “The closer you look, the more opportunities there are.”