The Republicans have recently released their proposed alternative to the Affordable Care Act (ACA), entitled: the American Health Care Act (AHCA).
One of the prime concerns they hoped to address was the Individual Mandate, as defined by the ACA. Their replacement, however, appears set to miss the behavioral objective which the enrollment incentive was designed to achieve.
Behavioral principles such as Prospect Theory, Certainty Effect and Present Bias define the short comings of their proposed legislation.
The Ongoing Challenge
After 7 years of fighting against the ACA, which the Democratically led 111th Congress enacted and President Obama signed into law in 2010, the Republican Party, under the 114th Congress, has presented their first detailed plan to replace the ACA. They are calling it the American Health Care Act.
The ACA is a complicated bit of policy, which in large measure reflects the nature of the problem(s) that it tries to address. Equally, the objections that people have with the ACA are complex. There are any number of aspects to the conversation regarding health care in America, and to both of these policies in particular, that might benefit from a behavioral science perspective. At the risk of taking a reductionists approach to a systemic issue, I’d like to focus on just one of those concerns.
The ACA enacted an individual mandate which said, in principle, if you don’t enroll yourself in an approved health insurance plan, the federal government will fine you with a tax penalty. For each full month that you forego health insurance coverage, the tax penalty would equal, roughly, $58.00 per adult. The maximum penalty for going without coverage for a full year would be $695.00.
For the ACA to work, from a purely economic perspective, healthy/ lucky people, who do not really need insurance, would need to pay into the insurance system so that unhealthy/ unlucky people can benefit. This is how insurance of all stripes works, generally. One of the challenges that the ACA was trying to address with the individual mandate was: ‘how to encourage young, healthy people to buy into the insurance system’ so that the system might function as a whole.
Prospect Theory & Bounded Rationality Aligned
From a behavioral economics perspective, the disincentives of the ACA seemed to align with the desired behavioral outcomes. The economic and emotional logic being: “As a healthy person I can either pay the government a small tax penalty, which will help subsidize the system, and forego health insurance. Or, I can purchase an approved insurance plan, which will help subsidize the system, and receive some benefits of being insured.”
The bounded rationality of the trade-off is pretty simple: “I know that I’m going to pay something, no matter what. I can either pay a penalty and receive nothing, or I can pay for a plan that at least covers me for the unexpected.” In both cases there is a certain near-term loss (either the insurance premium or the tax penalty). But, if I choose to go uninsured, there is a higher degree of uncertainty in longer-term outcomes. Whereas, if I choose the insured route, I have the certainty that I will be covered (relative to the chosen plan).
One of the caveats to this disincentive, however, was uncertainty regarding the relative effectiveness of the tax penalty. At $695 per year, it was significantly lower than the cost of any given insurance premium, then or now. People therefore criticized it, speculatively, as lacking the economic muscle to be an effective disincentive of foregoing insurance. While others made the argument that the tax penalty worked more from an emotional utility perspective, creating a new social norm through rules based signaling.
Alternative Assumptions, Alternative Penalties
The American Health Care Act, on the other hand, attempts to eradicate the individual mandate, as this was a major ideological sticking point with Republicans. (Not to mention that the Republicans promised to repeal the whole of the ACA in its entirety). What they propose in place of the individual mandate is to increase the insurance premiums on those Americans whose insurance coverage has lapsed for more than 60 days.
For example, assume you must forego health insurance for more than 60 days; this may be due to a chronic economic situation in which insurance is normally beyond your budget, or a shorter-term concern related to unemployment or other temporary factor. You won’t be fined by the government right away under the AHCA. In fact, nothing will happen until you attempt to insure yourself again. At which time you will face the prospect of a 30% increase in premium cost on whatever insurance plan you propose to purchase. That 30% increase would be in effect for the next 12 months of insurance coverage.
Consequences of Structure and Timing
From a behavioral design perspective, the proposed structure of the Republicans replacement for the individual mandate appears set to satisfy nobody’s interests. In fact, it may have potentially devastating impact on both individual health outcomes (as fewer people will be able to afford coverage) and on the bottom line of the insurers (as an insurance death spiral may ensue).
For young, healthy people who have never had an insurance plan before, the AHCA disincentive appears set to achieve the opposite of it’s stated goal. A 30% increase of an insurance policy that these young people never had equals zero in their accounting. They have no idea what the difference in cost (the true cost of the disincentive) would be because they have no baseline with which to make a comparison. Additionally, the penalty is off in the distant, uncertain future in which they may eventually need insurance. Given the impact of our present bias, this more or less insures that the additional cost is out-of-sight and out-of-mind, therefore rendering the disincentive wholly ineffective.
The other segment of the population that is most likely to forego insurance coverage are folks that are in the unenviable economic situation as to be unable to afford a policy in the immediate term due to circumstances. They would be balancing a near-term certainty (“I can’t afford it right now.”) with a distant uncertainty (“Will I absolutely need insurance in the next X# of days?”). The certainty effect in this case encourages a wait and see approach.
Intent is the Key Word in Communication
What the penalty might fully accomplish, however, is a guaranteed death spiral as the incentives seem structured to encourage people of all kinds to accept a lack of coverage in the short-term and to raise the bar-to-entry over the long-term.
How is such an incentive design supposed to be interpreted? Is this an unintended consequence resulting from chasing some other objective? Or is this the intentional application of a dark pattern? Your answer to that question probably depends on your political inclinations…