The American Health Care Act’s (dis)Incentives 

http://www.commondreams.org/views/2017/03/09/american-health-care-act-wealth-grab-not-health-plan

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…

Mint newspaper articles – ‘Behavior By Brain’

Wanted to update Blog readers on the series of articles in ‘The Mint‘ which I’ve been authoring. The articles, called ‘Behavior by Brain’, take a deep look at news and trends through the lens of ‘behavior’. Articles penned so far are linked below:

Hope you enjoy them. Do let me know your comments.

Are all crashes, ‘accidents?’

FinalMile works on a number of road safety projects where we are tasked with reducing incidents on highways. A key part of the work is discussions with the safety team and road users. When we ask them to narrate incidents they have seen or been in, many would say, “I was in an accident” or “I saw an accident.”  Oxford Dictionary defines accident as ‘an unfortunate incident that happens unexpectedly and unintentionally.’  Is it apt to call all the road incidents, ‘accidents?’

The word ‘accident’ is misleading because accident is something that just happens and is unintentional, whereas most crashes happen because of a bad decision made by a driver on the road. Even the crashes that happen due to over-speeding, distracted driving, or driving under influence (DUI) are referred to as accidents. When a driver responsible for a crash says “it was an accident,” what is implied is this: “I did not intend to do it” or “it was unavoidable” even though it was an active decision/choice made by the driver to over-speed, drive when drunk or text while driving. It is the same when a pedestrian jaywalks or crosses without looking. Calling them ‘accidents’ removes the active role the driver or the pedestrian played.

crash
Head-on collision involving two trucks, killing both the drivers on spot; one of the drivers was drunk – a picture taken during one of our road safety projects.

According to the National Crime Records Bureau (NCRB) report, during the year 2014 in India, 4,50,898 road collisions resulted in 1,41,526 deaths. As per the report, 47.9% of these fatalities were due to over-speeding, 41.5% were due to dangerous/careless driving and overtaking, 5.3% due to poor weather conditions, 2.8% due to mechanical defect and 2.6% due to DUI. If we exclude the fatalities that happened due to poor weather conditions and mechanical failure, 92% of the fatalities were due to driver’s error.

Source: NCRB report 2014
Source: NCRB report 2014

Also, based on a data studied by National Highway Traffic Safety Administration (NHTSA) of US, 94% of the collisions are due to driver’s error. Around 20 years ago, the US Department of Transportation initiated a campaign to eliminate the use of word ‘accident,’ and police departments of New York City and San Francisco have replaced the word ‘collision’ for ‘accident’ while filling out collision reports.  According to US National Highway Traffic Safety Administration, ‘changing the way we think about events, and the words we use to describe them, affects the way we behave. Motor vehicle crashes and injuries are predictable, preventable events. Continued use of the word “accident” promotes the concept that these events are outside of human influence or control. In fact, they are predictable results of specific actions.’

It is not just about control during the event. Language affects the chain of reasoning far beyond the event. People have a more general tendency to attribute their own behavior to situational factors and other’s behavior to dispositional factors – a social bias known as the “fundamental attribution error.”  Attribution theory helps us to understand why, in case of a crash, the driver attributes his fault to situational factors such as poor visibility or another vehicle, while ascribing behavior of the other driver to dispositional factors such as reckless/wrong side driving or over-speeding. The word ‘accident’ aids in ascribing the reason of the crash to external factors and makes it easy to rationalize. When the crash is clearly attributable to driver’s error, by calling it an accident, the driver is being excused for his negligence and unsafe behavior.  By referring to the crashes as accidents where the driver was not following the posted speed limits, manoeuvring dangerously on the road, or getting behind the wheel drunk, we are not holding the person responsible for the act. It is not that someone has to be blamed or held responsible for every crash, it is to make drivers more responsible and realize that crashes do not happen randomly.

The word ‘accident’ is very colloquial and it is a difficult task for sure to bring about the change in our system, but replacing it with ‘crash’ or ‘collision’ would be the first step to change our perception towards road safety.

Dealing with Fraud

blog-dealing-with-fraud-wells-fargo-scandal

The incentive structure of Wells Fargo has been rightly criticized for the fake account scandal. The roasting of Wells Fargo CEO at the Senate panel hearing has also brought to question the responsibility of the senior executives. However, the overall narrative may be missing an important component – Perception of Risk.

We can safely assume that the front end employees, who carried out the transactions, were largely aware of the illicit nature of their actions. Most likely they also knew the potential consequences such as losing their job, facing charges or even serving prison time. How did the employee’s perceive these risks? What factors moderated their risk perceptions?

These are difficult questions. Unlike the incentive system that is tangible and easier to measure, risk perception is not. Risk is a feeling and feelings are hard to quantify. Our feelings may be moderated by our goals, our ability to deal with outcomes, our past experiences etc. They are also influenced by our social context. The social norms prevalent can easily override the written rules and policies. If people around us are performing deviant behaviors such as the one we are dealing with in this case, we are more likely to follow them. With over 5000 employees implicated, we can expect this issue to be present.

Alternatively, employees may be managing a very different kind of risk. For example, fear of losing their job in the immediate future. The temporal aspect of this risk may amplify it even further and employees might rate it significantly higher than the risk of getting caught in the far future.

So while we are discussing changes to structural aspects such as incentives and punishments, we also need to give adequate attention to the softer side of the issue. We need to design strategies to moderate the risk perceptions. Conventional tools such as awareness / education based trainings have limited impact. This is especially true when the behavior in question is fairly obvious. After all, there is nothing gray about opening a fraudulent bank account. Interventions that provide continuous feedback closer to the work context might be more effective.

This still leaves us with the question of measurement. One way to do that may be identifying lead behaviors. For example, are employees more forthcoming in discussing or informing potential issues? Are managers rewarding such positive behaviors? Are we seeing an increase in minor deviances? Measuring these behaviors can provide organizations the relevant prediction capabilities and also the time to activate preventative strategies. 

Managing organization risks requires focusing on both top-down and bottom-up issues. While we hold the executives responsible to develop the right kind of organization structures, we also need to design tools that ensure alignment of behaviors across the system.

Image Source: The Intercept