Irrational model

It's long been known that healthcare does not fit the economist's standard model for perfect competition. But Douglas Hough, a professor of economics at Johns Hopkins University, goes further: He says patients, providers and other stakeholders are irrational. His book, Irrationality in Health Care: What Behavioral Economics Reveals About What We Do and Why, claims people are irrational in predictable ways. Jason Shafrin, a healthcare economist, recently interviewed Hough for Modern Healthcare.

Jason Shafrin: Your book focuses on behavioral economics and (how) its applicable to healthcare patients, caregivers and providers. How does behavioral economics differ from neo-classical economics?

Douglas Hough: Standard economics assumes that people are rational. Behavioral economics says they act nonrationally in predicable ways so we can actually predict what ways in which they are going to make mistakes. One of the themes of the book is that you have imperfect people making imperfect decisions. Behavioral economics is much better than standard economics at explaining and even predicting that kind of behavior

Shafrin: One of the most interesting concepts you mention in your book is action bias. Can you describe what action bias is?

Hough: Action bias is essentially, don't just stand there, do something. When patients visit a physician, they expect a physician to do something (whether it is) making a diagnosis, creating a treatment plan, writing a prescription, ordering an MRI (or) admitting the patient. There are a number of times, however, when the physician knows that there isn't really a need for any of that. The classic joke among physicians is that: “I can write a prescription and you'll get better in seven days, or I can not write a prescription and you'll get better in a week.” But what patients want is action.

Shafrin: Another interesting statistic you cite is that one quarter of new prescriptions are never filled. How can behavioral economics explain this phenomenon?

Hough: This is curious. You have patients who are asking for something to be done, yet 25% of them don't even fulfill their prescriptions. There are some standard economic reasons for that: The price could be too high or it could take a while to go and get the prescription. Where behavioral economics comes in here, perhaps the presenting problem starts to subside and it doesn't become as salient to the patient, and the patient decides, well, I really don't need the treatment after all, when in fact, the patient needs some action.

Shafrin: Do you think that physicians could do a better job of explaining the need for patients to adhere to their treatment regimen?

Hough: One curious observation is that adherence to treatment regimens go up a few days before seeing a physician and a few days after seeing a physician. So if a physician is really concerned about a patient adhering to a treatment regimen, he or she might strongly recommend that the patient come back within a week.

Shafrin: People often perform better, in terms of choosing better when they have fewer choices. Why is that the case? Most economists think that more choice is better.

Hough: What behavioral psychologists and behavioral economists have discovered is that more choice is not necessarily better. The problem is regret bias. If they are shown five things and are asked to choose among them, they can probably choose well. But if they are offered 25 or 50, people end up not choosing at all. This is actually what happened at the beginning of Medicare Part D, when patients were given an extraordinary number of prescription drug plans choices, and a good number of the elderly were paralyzed by having to make that choice. My mother was an incredibly successful business woman, but when at the age of 85 she was faced with the choice of among 45 plans in Virginia for Part D, she just threw up her hands and said, “Well, I don't know which one to pick. Doug, you pick one for me.”

Shafrin: But who chooses the choices?

Hough: There are a couple of ways which I think would be bad. For instance, some expert sits down and decides, here are the 10 best choices. That expert might not have the right set of preferences (for) an individual. One of the ways of doing this is to offer an individual five different choices randomly chosen from the 45. If you don't like one, we can give you five more. Or if you like this one, we can give you a couple of others ones to compare it with. You can continue until you as an individual are satisfied that you have the right plan.

Shafrin: In France, they have the consumers pay for physician visits up front, and only later is the patient reimbursed by insurance. Would a similar system in the U.S. improve efficiency and reduce utilization?

Hough: I think it would be a great idea. Here's where you have a nice blend of standard economics and behavioral economics. Standard economics says that if you raise the price from effectively zero, which an insured individual is going to be paying, to an actual physical price, then they are going to think twice if they actually need to go to that physician. Here's where the behavioral economics comes in: Raising the price affects behavior even when they will be reimbursed for that payment within a short period of time. I think it would be very effective for controlling unnecessary utilization of healthcare services.

Jason Shafrin, who blogs at healthcare-economist.com, is a research economist at Precision Health Economics in Los Angeles.

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