Session 30 PD, New research in Behavioral Economics in Health Care. Moderator/Presenter: Christopher James Coulter, FSA, MAAA, CERA

Transcription

1 Session 30 PD, New research in Behavioral Economics in Health Care Moderator/Presenter: Christopher James Coulter, FSA, MAAA, CERA Presenters: Keith Ericson, Ph.D. Ben Handel, Ph.D.

2 New Research in Behavioral Economics in Health Care Session 30PD

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4 Behavioral Economics Health Economics

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6 References Loewenstein et al. Consumers misunderstanding of health insurance. Journal of Health Economics 32 (2013) Sydnor, J., (Over)insuring modest risks. American Economic Journal: Applied Economics 2, Kate Ho and Ariel Pakes (2014) Hospital Choices, Hospital Prices and Financial Incentives to Physicians, American Economic Review, 104(12):

7 SOA Behavioral Panel -- Handel 1 Society of Actuaries Annual Meeting Panel Discussion: Behavioral Economics in Health Care Ben Handel Department of Economics Berkeley June 15, 2015

8 SOA Behavioral Panel -- Handel 2 Behavioral Economics and Health Insurance Choosing Health insurance for most consumers is: Complicated Boring Important What does this imply for choice quality? Active decision-making errors Default options, inertia, and passive decision-making errors Preponderance of evidence that both kind of errors are widespread Why should we care? Consumer welfare Insurance market outcomes and actuarial predictions

9 SOA Behavioral Panel -- Handel 3 Roadmap Active Decision Errors: Limited Information Passive Decision Errors: Inertia Implications for Risk Selection and Market Design

10 SOA Behavioral Panel -- Handel 4 Limited Information and Active Decisions Handel & Kolstad (2015) Study of consumer information in health insurance decisions for employees of large firm (~50,000 domestic employees) Choice between: Broad network PPO option with zero premium and zero cost-sharing HDHP option with same network, substantial subsidy into HSA Study value of insurance choices with: 5 years of claims data for employees and dependents Ex ante medical metrics using diagnostic information Insurance choices made Demographics and employment data Individual-level linked survey data

11 SOA Behavioral Panel -- Handel 5 Limited Information and Active Decisions Handel & Kolstad (2015) Despite evident financial value in HDHP, most people (85%) choose PPO Desire for risk protection by fully-informed consumers unlikely explanation More than $1,000 left on table (ex ante and ex post metric) by many

12 SOA Behavioral Panel -- Handel 6 Linked Survey Data Handel & Kolstad (2015) One method: ask consumers a series of simple questions near open enrollment about health insurance options Electronic survey randomly given to consumers after open enrollment in November multiple choice questions covering: Knowledge of plan financial characteristics Knowledge of own total health expenditures Knowledge of plan provider networks Knowledge of HSA advantages Knowledge of hassle costs associated with cost-sharing / HSA Survey randomly assigned to 4500 employees, response rate of approximately 40%, with limited selection on observables Directly linked to claims data and insurance choices data

13 Example: Provider Networks Handel & Kolstad (2015) SOA Behavioral Panel -- Handel 7 Both plans offered differ on financial characteristics but provide access to exact same provider network / covered services Hypothesis: Some consumers will associate better financial protection with broader provider access Evidence: (i) < 50% know networks same (ii) many not sure (iii) 20% in line with hypothesis (iv) Correlation w/ choices

14 Information Types Handel & Kolstad (2015) SOA Behavioral Panel -- Handel 8 Can classify consumers with information on one dimension, or aggregrate information across dimensions into index Index includes: Deductible Coinsurance OOP Max Provider Network Own Recent Expenses HSA Benefits Premiums

15 SOA Behavioral Panel -- Handel 9 Quantifying Impact of Limited Information Handel & Kolstad (2015) Mathematical decision model quantifying: Ex ante health risk Risk aversion Willingness-to-pay for PPO under limited information Perceived HDHP time and hassle costs Method to identify limited information impact on willingness-to-pay for more insurance: Identify ex ante health risk with statistical model using claims data Identify risk aversion using informed consumers Construct relative value for PPO and HDHP choices Compare choices of informed consumers and consumers with limited information, using survey responses

16 Impact of Limited Information Handel & Kolstad (2015) Provider Networks: $2,200 against HDHP for those who think it has fewer providers SOA Behavioral Panel -- Handel 10 Hassle Costs: Those who strongly dislike give up $220 per hour of perceived additional HDHP time and hassle costs Types: Direct ordering of information types and WTP for PPO

17 SOA Behavioral Panel -- Handel 11 Policy: Risk Protection and Forced HDHP Switch Handel & Kolstad (2015) Firm switched all employees to HDHP in years following empirical study What is true value of risk protection consumers lost? Value of risk protection lost much smaller when you take limited information into account (context specific)

18 SOA Behavioral Panel -- Handel 12 Roadmap Active Decision Errors: Limited Information Passive Decision Errors: Inertia Implications for Risk Selection and Market Design

19 SOA Behavioral Panel -- Handel 13 Inertia in Insurance Choice Strong evidence that consumer inertia in insurance plan choice leads to money left on the table that is quite a bit larger than when consumers make active choices Default option is typically previously chosen plan Markets / prices / benefits change over time Factors contributing to inertia: Provider lock-in / provider relationships Inattention combined with search costs Status-quo bias Examples: Handel (2013) Ericson (2013)

20 SOA Behavioral Panel -- Handel 14 Handel (2013): When Nudging Hurts Large self-insured employer changed entire menu of insurance options, forced all 10,000 employees to make active insurance choices from new set of 5 options Observe employees making active decisions in that year, then observe subsequent choices in presence of default options with substantial pricing / benefit changes Plans in new menu are financially differentiated but the same in terms of provider networks. We can thus identify: Actual preferences for insurance in active choice year Impact of inertia on consumer choice value, netting out persistent preferences for providers / plans

21 SOA Behavioral Panel -- Handel 15 Handel (2013): Descriptive Inertia Evidence Plan choice for low income families in active choice year

22 SOA Behavioral Panel -- Handel 16 Handel (2013): Descriptive Inertia Evidence Large change in premiums for next year, when people default into previously chosen option 30% of families had plan become completely dominated 89% of those families continue to choose that plan!

23 SOA Behavioral Panel -- Handel 17 Handel (2013): Large Premium Changes

24 SOA Behavioral Panel -- Handel 18 Handel (2013): New Employee Choices

25 SOA Behavioral Panel -- Handel 19 Handel (2013): New Employee Choices

26 SOA Behavioral Panel -- Handel 20 Econometric Model to Quantify Inertia Impact Develop econometric model of consumer decision-making under uncertainty to quantify impact of: Risk aversion Ex ante health risk (individual and families) Inertia Key idea: use preferences expressed in active choices to model what choices should be in passive choice years Inertia matters a lot: Consumers leave an average of $2,000 on table due to inertia Consumer who make other active choices (e.g. FSA) leave less money on the table

27 SOA Behavioral Panel -- Handel 21 Policies to Reduce Inertia Natural next step is to reduce inertia with available policies Possible policies: Reminders Information Provision Targeted Information Provision Targeted Recommendations Active choice only Targeted Defaults / Smart Defaults Product Standardization Set up counterfactual analysis to study impact of policies

28 Policies to Reduce Inertia SOA Behavioral Panel -- Handel 22 As policies to reduce inertia become more effective, consumers make better choices given market structure Consumer welfare increases by several hundred $ per person

29 SOA Behavioral Panel -- Handel 23 Roadmap Active Decision Errors: Limited Information Passive Decision Errors: Inertia Implications for Risk Selection and Market Design

30 Policies to Reduce Inertia Endogenous Insurance Offerings SOA Behavioral Panel -- Handel 24 Adverse Selection: Insurer costs linked to who buys insurance. Sicker consumers = higher costs = higher premiums Higher premiums = less comprehensive insurance Widespread consumer choice issue has direct / strong impact on the extent of adverse selection in insurance markets Consequently, policies to aid consumer decision-making have direct and strong implications for extent of adverse selection

31 SOA Behavioral Panel -- Handel 25 Policies to Reduce Inertia: Handel (2013) Endogenous Insurance Offerings Insurer pricing model: prices this year equal last year s average costs Reducing impact of inertia by 75% substantially increases adverse selection, and reduces consumer welfare by 6% 6% of cons. Premiums Context-specific, key implication is that choice policy matters for riskbased selection

32 SOA Behavioral Panel -- Handel 26 Other Policies: Handel et al. (2015) Paper uses estimates of active choice mistakes from Handel and Kolstad (2015) to show impact of choice frictions for: -- Price subsidies -- Choice policies -- Risk adjustment -- Actuarial value regulation Assumed competitive insurance market, similar to ACA exchange Key insight: Effective riskadjustment transfers complementary to choice policies. Matters more (potentially a lot more) when consumers make better decisions.

33 SOA Behavioral Panel -- Handel 27 ACA and Decision Interventions Consumer Agency Healthcare.gov Decision Tools General Recommendations Threshold-Based Targeted Defaults Aggressive Smart Defaults Targeted Recommendations Choice Effectiveness in Market Defaults Non-Inertial Key element of ACA exchanges (and many insurance markets) is insurers competing to attract consumers, who in turn discipline the market Empirical evidence on behavioral decision-making (as in Choose to Lose? ) suggests inherent tension between managed competition paradigm and interventions to fix consumer mistakes [see e.g. Einav and Levin (2015)] As more aggressive paternalism is implemented, consumers aren t the ones disciplining the market

34 Wrap Up SOA Behavioral Panel -- Handel 28

35 SOA Behavioral Panel -- Handel 29 Lessons Consumers make mistakes when it s possible to do so in insurance plan choice, and can lose a lot of money Difficulties with active decision-making Difficulties with defaults and inertia Consumer decision-making has important implications for the extent of risk-based selection in the market Interventions to improve choices could make all consumers worse off Effective risk-adjustment transfers complement decision-making policies There is still a lot to learn about: Specific mechanisms underlying consumer choice of complex products Firm responses to consumer choice inadequacy Market design and choice policy in ACA and related markets

36 Consumer Decision Making on Health Insurance Exchanges Keith Marzilli Ericson Society of Actuaries, June Boston University and NBER Papers online at:

37 Health Insurance Exchanges / Marketplaces ACA relies on health insurance exchanges (HIX) 20 million enrollees, $100 billion/year in subsidies HIX differ from existing markets new questions Insurers sell directly to consumers, public prices Pre ACA: individual market small (5%), serving as gap coverage with short duration, limited generosity Examine interaction of consumer choice, insurer strategic behavior, and regulation in HIX

38 Overview of Today s Talk Mandates: Entering the Market Price Sensitivity and Markups on Massachusetts HIX Standardization and Choice Architecture on HIX Renewal Decisions and Defaults

39 Mandates: Entering the Market Price Sensitivity and Markups on Massachusetts HIX Standardization and Choice Architecture on HIX Renewal Decisions and Defaults Ericson and Kessler. The Articulation of Government Policy: Health Insurance Mandates Versus Taxes

40 Mandates: Do I buy at all? Adverse selection into insurance was major concern if only sick enter, death spirals ACA contains individual mandate to buy insurance Raises price of being uninsured: pay max of 2.5% of income or $695 Major political, supreme court fight over constitutionality Other changes in relative prices less controversial: $695 subsidy to buy insurance has same net effect Mortgage subsidy not described as mandate to buy a home Moral suasion of the mandate? Could the same effect have been achieved with a simple reframe as a tax or subsidy?

41 Compare Financially Equivalent Policies 1670 subjects recruited from online labor market Experiment took place on four different dates Policy is in flux, suppose gov t decided: Mandate: to mandate everyone purchase insurance, or else pay a fine of $700 each year Tax: to recommend that everyone purchase health insurance, and charge people without insurance an uninsurance tax of $700 each year How likely are you to buy $3000/year, $2000/year

42 Major Controversy about Mandate Developed after waves 1 & 2 End of March 2012, Supreme Court oral arguments How did controversy affect mandate? Total # of Articles News Articles about the Mandate 2010 January 2010 March 2010 May 2010 July 2010 September 2010 November 2011 January 2011 March 2011 May 2011 July 2011 September 2011 November Month 2012 January 2012 March 2012 May 2012 July 2012 September 2012 November 2013 January

43 Experimental Results Relative Effect of Mandate vs. Tax Difference in Percentage Likelihood of Purchase at $3000/year Wave 1 (Dec 2011) Wave 2 (Mar 2012) Wave 3 (June 2012) Wave 4 (Nov 2012) -10

44 Experimental Results Relative Effect of Mandate vs. Tax Difference in Percentage Likelihood of Purchase at $3000/year Wave 1 (Dec 2011) Wave 2 (Mar 2012) Wave 3 (June 2012) Wave 4 (Nov 2012) -10

45 The Mandate Mattered Large effect of articulating the policy as a mandate rather than an tax in the pre-controversy period After the controversy surrounding the mandate this effect is gone. Disappears in all demographic groups Not due to changes in information, etc Moral suasion of mandate lost due to controversy May have undermined enrollment in HIX Framing of policy has an impact

46 Mandates: Entering the Market Price Sensitivity and Markups on Massachusetts HIX Standardization and Choice Architecture on HIX Renewal Decisions and Defaults Ericson and Starc Heuristics and Heterogeneity in Health Insurance Exchanges. American Economic Review Ericson and Starc. Forthcoming. Pricing Regulation and Imperfect Competition. Review of Economics and Statistics

47 Massachusetts HIX Established as a result of state reform Guaranteed issue Modified community rating: price by age : no risk adjustment, no subsidies here Successful mandate

48 Consumer Price Sensitivity on Mass. HIX How do consumers substitute among plans when insurers raise premiums? Prices = cost + markup Determines how insurers set price markups Model: Discrete choice Plan j has utility: uu iiii = ββxx jj αα ii pp jj + εε iiii Logit market share: ss jj = exp(ββxx jj ααpp jj ) jj exp(ββxx jj ααpp jj ) Firm s first-order condition for price setting pp jj = cc ss jj ss jj = c + 1 αα(1 ss jj )

49 Consumer Price Sensitivity on Mass. HIX First result: big gain to being the cheapest plan Equivalent to $300-$550/year premium decrease Consistent with heuristic choose the cheapest ; cheapest plan is listed first Competition at bottom of the market may be quite different from top of the market Consistent with heuristics or heterogeneity Heuristic: choose the cheapest, is 1 st plan listed Heterogeneity: some people just want the cheapest plan (e.g. to satisfy the mandate)

50 Older Individuals Are Less Price Sensitive Fraction Choosing Bronze < >55 Age Category Chose Bronze Premium Difference Average Premium Difference, Gold - Bronze Reduced form fact Marginal cost of more generous plan rises with age Older individuals don t substitute toward less generous plans Or less generous brands

51 Identification of Price Sensitivity Prices jump at round #s Age 49 v 50: Similar people, different prices 45+ are half as price sensitive as under 45 implies firms would charge twice the markup over cost Monthly Premium in $ Average List Premium Age

52 Imperfect Competition & Price Regulation Age-band regulation: Prices for oldest can only be twice price for youngest Age-bands in perfectly competitive market move price toward average cost transfers $ from the young to the old Imperfectly competitive market still transfers $ from the young to the old firms price to the marginal consumer here: young, cheap, and price sensitive lowers markups, increases efficiency lowers firms profits Compared to no price regulation, age-bands: raise consumer surplus by about $600/enrollee-year lower firms profits by $300/enrollee-year Implications for risk adjustment as well

53 Mandates: Entering the Market Price Sensitivity and Markups on Massachusetts HIX Standardization and Choice Architecture on HIX Renewal Decisions and Defaults Ericson and Starc. How Product Standardization Affects Choice: Evidence from the Massachusetts Health Insurance Exchange

54 Standardization and informed choice Competition relies on informed consumer choice Confusing choices in many markets Health insurance: many complex attributes Coinsurance, deductible, maximum OOP, doctor visit copay, Rx drug tiers 1, 2, and 3, ER copay, Abaluck and Gruber 2012, Kling et al 2012, Kolstad and Handel 2013 Choice architecture: tiers facilitate comparison Mass HIX: 2010: Standardized cost sharing by tier

55 Choice Process: Pre-Standardization

56 Choice Process: Post-Standardization

57 Choice Process: Post-Standardization

58 Standardization: Policy Change "Consumers don't have to worry that there's some sort of 'gotcha'... They are comparing equivalent products and so make better informed decisions based on premium and provider differences". Nancy Turnbull (HIX Board) Intuition #1: Standardization makes consumers more price sensitive, increases price competition Intuition #2: Increase weight on dimensions now easier to observe

59 Results of Standardization More generous plans chosen Major shift in brand choices Little change in price sensitivity

60 Decomposing Standardization Sources of the effect: Availability: What products were available changed Valuation: weights consumers place on attributes changed (e.g. context-dependent preferences) We decompose via a discrete choice model σ brand (0.155) σ cost-sharing 4.43 (0.382) σ premium 1.11 (0.097) Generosity shift due to valuation effect, brand shift due to availability effect

61 Mandates: Entering the Market Price Sensitivity and Markups on Massachusetts HIX Standardization and Choice Architecture on HIX Renewal Decisions and Defaults Ericson. When Consumers Don t Make an Active Decision: Equilibrium Effects of Dynamic Defaults. Ericson. Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug Insurance Exchange. American Economic Journal: Economic Policy

62 Inertia in Plan Choice: Defaults Matter Medicare Part D Initial assignment default: Low Income Subsidy (LIS) recipients assigned to plan below threshold Matters in year 1 and beyond Automatic switching default If firm raises price in year 2, LIS switched to cheaper plan High income enrollees have to actively switch

63 Inertia in Plan Choice: Firms Respond Insurers respond by using invest-then-harvest pricing Offer low prices in early years, capture enrollees Costly to switch Raise prices in later years Unnecessary churn between plans, lower investment in enrollee health Early years: good deal Reenrollment default v. active decision Density Medicare Part D Premiums in Monthly Premium Cohorts Cohorts Cohorts Regression Result: Older plans are 20% more expensive than equivalent newly introduced plans (weighted by enrollment)

64 Behavioral Economics and Insurance Consumers value insurance plans in complex ways Other work: they choose dominated plans, they overweight salient features of plans, they have low insurance literacy Pricing: role of consumer price sensitivity for optimal pricing, as well as inertia Choices consumers make will depend on environment Role of standardization, role of disclosure for networks