Behavioural Economics In Healthcare Policy
Updated: Nov 21, 2019
Behavioural Economics in Healthcare Policy
By Malvick Ong
For all who took Econs 101, standard economic theory roots itself on the assumption that people are rational, self-interested and utility-maximising agents. As such, individuals are assumed to make optimised decisions by weighing the cost/benefit of competing options. Authors of Freakonomics, Steven Levitt and Stephen Dubner, succinctly encapsulate the essence of Economics as the ‘study of incentives’. For a long time, economic rationalism has played a vital role in shaping public policies by getting policymakers to “shape incentives correctly”. By adjusting individual’s assessment of cost or benefit, policymakers are able to apply incentives to influence ideal and predictable outcomes for society.
In recent years however, policymakers have come to realise that economic rationalism though necessary, is not sufficient as a model for policy making. In reality, the decision making process of individuals when confronted with options are more complex than the usual cost/benefit analysis prescribed. Works of Herbert Simon in the 1950s first explored the ideal of individual’s bounded rationality leading to satisficing (good enough) behaviour. Subsequent expansion by Daniel Kahneman and Amos Tversky in the 1970s is the notion that individuals sometimes rely on heuristics (mental shortcuts) to make decisions which are limited by cognitive biases. Such root forth the study of Behavioural Economics which attempts to shed light into the irrationalities of human behaviour using a combination of psychology and economics.
A caveat beforehand, behavioural economics should be seen as providing an alternative lens to problem-solving, an additional set of tools to complement conventional economics for decision makers. This article attempts to delve into the role of behavioural economics to better shaping healthcare policy design by exploring the various healthcare systems.
Global Healthcare Spending
Data from Deloitte 2018 Global Healthcare Outlook shows global healthcare spending is set to increase at an annual rate of 4.1% from 2017 to 2021, up from just 1.3% from 2012 to 2016. Combined health care spending in the world’s major regions is expected to reach USD$8.7 trillion by 2020, up from USD$7 trillion in 2015 .
Fig 1. OECD Healthcare Expenditure (source: Deloitte)
The graph shows United States (US) topping the chart spending close to 16.9% of GDP or roughly US$11,356 per person on healthcare. Other developed countries such as United Kingdom (UK) spent a good 9.8%, or nearly a tenth of their GDP in healthcare alone. In contrast, data from World Health Organisation (WHO) shows Singapore spending 4.9% of GDP on healthcare in the very same year .
While there are no exact resource allocation rules for each country to devote into healthcare, it is assumed that policymakers would want to make healthcare affordable and accessible for those who need it while balancing the cost of such provision. Such ‘efficiency’ in healthcare spending ensures that every dollar spent by the government reaches its intended target group. To this extent, Singapore’s healthcare could be been considered as the hallmark of such a balancing act after consistently being ranked top by United Nation (UN) 2017 Global Health Ranking and 2nd by Bloomberg’s 2018 Healthcare Efficiency Index . So why are some developed countries not getting their values worth in healthcare spending and how does Singapore’s healthcare policy differs from the rest with insights from behavioural economics?
Views on Healthcare System
The Laissez-faire principle suggest a preference for the absence of government intervention as markets left on its own under the guidance of the “invisible hand” is efficient. Equilibrium price reached by consumers’ demand and producers’ supply is the ultimate true value of the product/services. Free market works best in a perfectly competitive market structure; assuming low barriers of entry, perfect information and product homogeneity. Advocates of free market tends to favour privatization of industries in view that this will make it more competitive and drive prices down for consumers. A typical example of this is the US where the majority are non-federal hospitals. According to the American Hospital Association (AHA), for-profit hospitals consist an estimated 25% of all non-federal hospitals . While this may work for some industries, the assumptions entail are not very realistic in healthcare.
Consumption of Healthcare
For one, information asymmetry exists especially so in the healthcare industry as the same surgical procedure could be charged at vastly different price points due to a myriad of complicated factors. Hospitals do not put pricing for their procedures online in the same way e-commerce retailers Taobao and Amazon does. Without a standard benchmark, hospitals in the US typically rely on the chargemaster, which is a comprehensive list of billable items, to determine cost for patients. A typical knee-replacement surgery may vary by as much as US$38,000 depending on the State where the surgery is operated in .
Moreover, patients generally do not know enough about medicine and tend to rely on doctors’ advice. The rise of an emergency situation also does not warrant patients sufficient time to establish pricing before being treated. This allow healthcare providers to create a higher than necessary demand for healthcare services, an economic concept known as ‘supplier-induced demand’. In a free market environment, an unregulated healthcare industry may result in a high consumption rate.
Another aspect of healthcare market is the private insurance industry. Most insured patients do not have to make direct payments for the cost incurred. While it may be more efficient to finance using a collective pooled fund compared to having individuals save up huge amounts for medical contingencies, such indirect payment could lead to the moral hazard of overconsumption. Behavioural economists termed this “saliency bias” which occurs when payment is decoupled from consumption resulting in a reduction in perceived cost and thereby encouraging consumption. The same phenomenon where individuals tend to spend more with a credit card/e-wallet.
This moral hazard of over-consumption coupled with adverse selection may lead to a higher insurance premium and deductibles due to the cost pooling nature of insurance . Data from the National Conference of State Legislators showed an increase of 5% for the average annual premium of employer-based family coverage in 2018 . Over time, the increase premiums amongst private insurers in the free market will exclude many and provide inadequate coverage for those who need it the most. This issue was particularly prominent in the US prior to the Affordable Care Act (ACA) also known as Obamacare.
This market failure in healthcare might cause policymakers to steer to the other extreme end of nationalisation which was what the UK did with their publicly-funded National Health Service (NHS). Although this solves the “cherry-picking” problem by providing coverage for all, the moral hazard of over-consumption is still present. This issue may be compounded further as consumers with free or heavily subsidised healthcare have even less incentive to practice prudence in their consumption behaviour. With all these in mind, healthcare can be considered a sector which requires significant government regulation, subsidy and provision.
Healthcare Financing in Singapore
In the context of Singapore, the policymakers adopted an approach where intervention is proportionate to the severity of market failure and informational asymmetry. These issues are especially prominent in acute care where majority of hospitals belongs to the public sector. The country uses bulk purchasing to control prices of generic drugs. Private general practitioners play a larger role in primary care where reliable information on common ailments are more available (less informational asymmetry). Cost in primary care tend to be relatively lower than acute care due to its low-impact nature and therefore require patients to bear a larger share. Community Health Assistance Scheme (CHAS), acts as a secondary line providing low-income and the elderly with subsidised primary care.
Fig 2. Healthcare Tier System (source: Ministry of Health)
Today’s healthcare system could be explained as a hybrid of public and private funding with multiple tiers of protection to ensure affordability while reducing reliance on government financing. Firstly, Medisave is a mandatory savings plan forming part of the Central Provident Fund (CPF) where working individuals are required to save 4% – 10.5% depending on age and income . Insights from behavioural economics show individuals are present bias with the tendency to ‘hyperbolic discount’ and defer savings for present consumption. This runs contradictory to conventional permanent income hypothesis and Ricardian equivalence and is the rationale for mandatory savings.
This is followed by MediShield Life, which is a low-cost mandatory national health insurance scheme for critical illnesses. This is where social insurance (which can be supplemented by private insurance) utilises the nature of risk pooling effectively for the low-probability and high-impact acute care. Policymakers and insurers utilises the notion of copayments and deductibles to deter overconsumption as seen in the RAND Health Insurance experiment . Means Testing is also used to determine the ability of individuals to foot medical bills thereby allocating more subsidies to those in need.
It is interesting to note that prior to MediShield Life in 2015, the original MediShield utilised a default opt-in option . While conventional economic rationalism hypothesis that individuals should be indifferent to the default function and should choose the most beneficial option, behavioural economics shows otherwise. Nobel-laureate Richard Thaler wrote extensively in his book on “Nudge Theory” where the effects of subtle policy shift to encourage individuals to make decisions that are in their broad self-interest. In his organ donation experiment, it is shown that having opt-in as the default option saw a donation rate of 90% compared to 15% for the inverse . Similarly, having an opt-in default raises the number of individuals protected under MediShield.
Lastly Medifund, a government funded social safety net for individuals who have depleted their Medisave and Medifund. This government endowment fund helps provide targeted assistance mostly for elderly and children as a last line of protection, through the interest income accumulated from the capital sum.
To combat information asymmetry in the healthcare sector, the Ministry of Health (MOH) published fee benchmarks for some of the common surgical procedures by private surgeons on their website last year . This utilises anchoring heuristics which provide individuals a reference point for how much to expect for their surgery. Albeit not perfect, behavioural economics gives policymakers a better perception of human behaviour to continuously improve policies in the most effective manner.