The minds of members

Just when MCOs think they’ve got value-based insurance design (VBID) wrapped up in a neat little package, the underlying force of behavioral economics begins driving the actions of the beneficiaries. In simple terms, behavioral economics is the effect the actual decision-making process has on the decisions that members reach.

While behavioral economics might be new to healthcare, it is not a new concept. Economists and psychologists have been studying it since the 1950s. Josh Klapow, clinical psychologist at the University of Alabama at Birmingham, says it is basic “operant conditioning,” which says changes in behavior are the result of an individual’s response to stimuli that occur in the environment.

“In short, we are studying how we engage populations in changing behavior, and modifying the environment is the most powerful way to influence behavior,” he says.

While this effect can cause unintended results for VBID initiatives, it can also be leveraged to the health plan’s advantage.

“Applied behavioral economics can help optimize value-based benefit designs,” says Emma Hoo, director, Pacific Business Group on Health. “Healthcare decisions can be as much emotionally driven as fact-driven. Financial incentives can help direct individuals to high-quality, cost-effective services such as preventive diagnostic services or treatment-option decision support, but copayments and coinsurance by themselves are relatively blunt instruments. Equally important are how we structure and communicate evidence-based healthcare choices to help people get the right care at the right time.”

Cyndy Nayer, founder and president/CEO of the St. Louis-based Center for Health Value Innovation (CHVI), which serves as a collaborative hub for value-based design, acknowledges that VBID ties in with the emerging study of behavioral economics.

“To reduce avoidable waste and future risk and to drive individual competency in managing personal health, we use levers—mechanisms for promoting desired behaviors to optimize performance. These are fundamental components of the behavioral economics scenario.”

Nayer describes three important elements of behavioral economics:

• The ability to overcome resistance to change by presenting a vision of potential benefits that will not cause member disruption;
• Making information relevant by showcasing success in similar populations—identifying with peers who have succeeded; and
• Promoting urgency so that the change happens in a short period of time and individuals are rewarded quickly for it.

Alan Garber, MD, professor of medicine at Stanford University and of economics at the Stanford University Graduate School of Business, believes that social norms are a strong factor in influencing decisions. He also cites the importance of regret and the opt-out choice.

“Social norms are what are expected of us, although they may earn praise or criticism,” he says.

Although Dr. Garber says that VBID and behavioral economics intersect—they both take human behavior and benefit design into account in trying to improve health—he believes that VBID relies on incentives while behavioral economics finds other ways to influence decisions, especially by recognizing what motivates a person, which is often, but not always financial gain.

Although looking at it from a psychological point of view, Klapow agrees that assumptions about motivating incentives are not always right.

“Incentives are rarely delivered in a manner that is consistent with behavioral modification,” he says. “The challenge is to be able to create an incentive structure in which individuals have the opportunity to choose their own reinforcers, which most employers don’t enable. That will increase the power of the system. I’m seeing good intentions with no science to back them up.”

While the psychological innerworkings of member behavior are worth exploring, the more practical task is applying behavioral economics to plan design to gain the intended results for plan sponsors and members.

CHOOSE YOUR DEDUCTIBLE

Lowe’s Companies, a large home improvement retailer based in Mooresville, N.C., designed a benefit structure that applies behavioral economics principles to health risk assessments (HRAs). Lowe’s offers its 225,000 employees the choice between a $500- or $750-deductible benefit plan.

For 2010, if employees wanted to opt for the lower deductible plan, they had to complete a health risk assessment during 2009, according to Bob Ihrie, senior vice president, employee rewards and services at Lowe’s.

“It didn’t take much convincing,” Ihrie says. “Employees wanted the best plan possible.”

He says that Lowe’s had been trying to encourage HRA completion for years by using an incentive, but only 15% of employees took advantage of the offer. Its new approach using the lower deductible has garnered 82% participation in the HRA.

“There is more aversion to risk than attraction to gain in the decision. Employees don’t want to lose the best coverage, so they choose to participate,” he adds. “Previously, they earned an incentive, but apparently it was not enough to urge them to take the HRA. However, with the penalty of a higher deductible, they see it as losing money.”

Pharmacy benefit programs are also fitting opportunities to apply behavioral economics.

Express Scripts’ chief scientist Bob Nease finds that the use of loss aversion is effective, with fear of loss outweighing need for gain. Knowing the enrollees’ sensitivity to loss can help shape strategies to influence behavior, such as encouraging the use of mail service for ongoing drug therapy.

The PBM has been targeting members with low medication adherence through different communication vehicles and found that a letter signed by the chief medical officer was effective when it emphasized the downside of not using home delivery. A message stressing that members would lose money if they didn’t use mail service elicited an 84% response—a percentage that reflects the relative increase in click-through rates—while an approach emphasizing time and money savings only received an 18% response in click-through rate increases.

“We are not wired to be rational,” Nease says. “The underpinnings of our behaviors are carved into our brains.”

To reduce costs, Lowe’s explored ways to urge employees to use mail delivery for their maintenance medications. Partnering with Express Scripts, Lowe’s “nudged” employees to voluntarily select mail service by emphasizing that the switch was not mandatory, did not require any changes in plan design and offered many benefits, including lower copays.

If employees did not want to use mail service, they would have to opt out.

“We used social norms—the idea that ‘everyone else is doing it’—to frame the right message and choice architecture, which are the conditions under which decisions are made, to overcome procrastination, while also making it easy to switch to home delivery by offering employees assistance,” Ihrie says.

For example, Lowe’s put a message on its Web site, inviting employees to sign up for home delivery by noting combined savings for the plan and employees of $5 million. The communication also told employees that they could fill their first and second supply of maintenance drugs at any network pharmacy, but would have to pay full price for the third fill at retail. A personalized letter to employees also reinforced using mail service.

Prior to the program, only 15% of employees used home delivery, increasing to 39.5% with the new approach. Ihrie says that all new employees or current employees who get a new maintenance prescription in 2010 will have to use home delivery. Those who opted out of home delivery in 2009 are permitted to continue filling their prescriptions at retail, but they will pay double the copayment starting next year.

According to Ihrie:

• Know your culture and employees’ tolerance for change;
• Target those most in need;
• Make communication a priority;
• Increase the intensity of communication as the time of decision nears; and
• Promote shared responsibility.

Behavioral economics has tremendous potential to get people to do what’s right without imposing a mandate, he says.

Getting members’ attention can also drive higher participation.

“An incentive might drive employees to choose home delivery, but it would just get lost in the tsunami of more important things. Instead, you have to add a ‘nudge,’ such as a reminder at the point-of-service about the ease of refills through mail service,” says David Laibson, professor of economics at Harvard University who teaches behavioral economics. “It makes you stop and think about the activity. Although incentives can work, you need a default selection process with an easy opt-out, deadlines and social pressure.”

Laibson uses enrollment in a 401(k) retirement plan as an example of the power of the opt-out alternative. He cites that only half of U.S. employees save enough for retirement, partially because they procrastinate on starting an account. When using an opt-out approach enrollment for new hires can jump to 85%.

“People already know what they should do and want to change their behavior, but they don’t want to follow through,” he says. “Delayed gratification doesn’t work. It’s hard to sacrifice today for tomorrow so you need an intervention that will facilitate behavior change—not dictate it—and make the change easy to execute,” he says.

The behavioral economic force in delayed gratification is that costs come early and benefits arrive late.

“Employees have a hard time aligning their good intentions and their actions,” Laibson says. “When costs precede benefits, decision makers fail.”

Laibson recommends interventions that make good behavior easy or bad behavior hard. While he believes that incentives alone will not do the job, he still sees a complementary relationship between behavioral economics and value-based design.

“Value-based benefits improve the tool box by offering other nudges to do the right thing,” he says, “but you need to leverage the psychology of problems to steer people in the right direction.”

Laibson cautions against interventions that are not cost-effective and don’t deliver the biggest bang for the buck, such as offering incentives to those who would demonstrate good behavior even without a reward.

HEALTHCARE’S ECONOMICS

There is widespread acceptance that incentives for patients and clinicians are not aligned. Patients regularly confront financial barriers while clinicians are paid for the quantity of services they provide, regardless of the results.

“As we consider healthcare system transformation, behavioral economics principles, which include social and emotional factors in consumer decision making, should play a substantial role,” says A. Mark Fendrick, MD, professor, Department of Internal Medicine and the Department of Health Management and Policy at the University of Michigan at Ann Arbor. He says he can see the common thread of loss aversion running through value-based benefits and behavioral economics

“Empirical evidence suggests that the clinical and financial effects of adding a healthcare benefit for those who don’t have it will not have the same, but rather, the opposite effect if that exact same benefit was taken away from those who already have it,” he adds.

Dr, Fendrick says that loss aversion is taken into direct consideration in evaluating the impact of VBID programs, which explicitly attempt to align incentives by lowering patients cost share and increasing clinician payment for high-value medical services.

“The expected differential effects of an equal incentive—the carrot—and disincentive—the stick—which diverges from classical economic decision-making can be explained by behavioral economics,” he says.

Jeff Munn, principal, health Management Consulting Practice for Hewitt Associates, says behavioral economics offers real-world insight into people’s day-to-day behavior and what guides decision making.

“Since behavioral economics looks at how real people take action and make decisions, it enables us to predict when poor decisions will be made,” Munn says. “If we apply this insight, we can take measures to counteract these decisions.”

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