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Behavioral economics meets healthcare. PriceWaterhouse Cooper
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Consumer-Centric Health: Models for Change '11
www.pwc.com/diamond
Behavioral Economics Meet Healthcare October 2011
Tom Weakland – Enterprise Strategy & Conversion, Health Industries Advisory
PwC
What is Behavioral Economics?
PwC
PwC
Behavioral Economics is the application of neo-classical economics and psychology to explain irrational* behavior
• People are rational and driven by self-interest
• People make decisions which maximize their own economic utility
• Assumptions break down when humans do not consider decisions in unemotional, strictly rational terms
• Decision-making is affected by environmental influences
• Provides explanations as to why people’s decisions differ from classical economic predictions
+
• Identifies common “shortcuts” used in consumer decision-making
• Explains external variables affecting consumer decision-making
• Explains market inefficiencies
• Offers insights into product design and marketing
*Behavior not predicted by traditional economic theory (typically attributable to cognitive biases, limitations in knowledge/cognitive ability, or psychological / environmental factors)
Neoclassical Economics
Cognitive Psychology
PwC
Behavioral economic principles can be classified into four broad categories
• 1.1 Relative Choices
• 1.2 Reliance on Defaults
• 1.3 Attribute Priming
• 1.4 Mental Accounting • 1.5 Framing 1. Decision
Short-cuts 2. Value
Assessments
4. Emotional Impacts
3. Social Impacts
Behavioral Economics – Our Framework
• 2.1 Love of Free
• 2.2 Anchoring
• 2.3 Endowment Effect
• 2.4 Hyperbolic Discounting
• 4.1 Loss Aversion
• 4.2 Self-Herding
• 4.3 Self-Control Facilitation
• 4.4 Hot vs. Cold States
• 4.5 Overconfidence Effect
• 4.6 Risk Aversion
• 3.1 Social/Financial
Domains
• 3.2 Dishonesty Effect
• 3.3 Signaling
• 3.4 Bandwagon Effect
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Behavioral Economics - Cross-Industry Behavioral Economics Perspective – 1. Decision Shortcuts
Defaults
0
20
40
60
80
100
% O
rg
an
Do
no
rs
Organ Donation by Country
Lower Percentage of Organ Donors
Higher Percentage of Organ Donors
Retirement Research Consortium, August 2008
PwC
Relative Choices
Is This Expensive?
Signature 6 Burner BBQ
$5,984.05
1Predictably Irrational, Dan Ariely
PwC
Relative Choices
Behavioral Economics Principles
Is This Expensive?
Signature 6 Burner BBQ
$5,984.05
$6,299.00
1Predictably Irrational, Dan Ariely
PwC
Relative Choices
Behavioral Economics Principles
Is This Expensive?
Signature 6 Burner BBQ
$5,984.05
$12,500.00
$6,299.00
1Predictably Irrational, Dan Ariely
Signature 6 Burner BBQ: Gold Plated Edition
PwC
Love of Free
Behavioral Economics Principles
1Bloomberg Businessweek, Stone 2010
PwC
Love of Free
Behavioral Economics Principles
Prime members increase purchases by 150% and account for 20% of all
Amazon purchases1
1Bloomberg Businessweek, Stone 2010
PwC
Why is Behavioral Economics Relevant to Healthcare?
PwC
Poor Behavior and Choice is a Rampant Problem
• 3 in 4 Americans do not take their prescribed medications as directed
• No show rates for doctor’s appointments are 20-30%
• 34% of US adults over 20 years old are obese
• Over the past 30 years, the number of overweight children has doubled and the number of overweight teenagers has tripled
• Diabetes prevalence has increased by 33% in the in the past 20 years
• 1 out of 3 children born today will develop diabetes at some point in their lifetime if dietary trends continue
PwC
Poor Behavior and Choice Costs Money
• Healthier diets could prevent over $70 billion per year in medical costs, lost productivity, and lost lives – USDA
• In 2008 the direct medical costs of obesity was $148 billion (and unchecked will rise to $344 billion in 2018) - CDC
• Prescription non compliance costs ~ $290 billion per year
• Missed Doctor visits cost over $150 billion per year
• Inappropriate ED visits (by insured) costs up to $10 billion per year
• State and federal governments spend one thousand times more to treat disease than to prevent it ($1,390 vs. $1.21 per person each year) - CDC
PwC
Poor Behavior and Choice Kills
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
453, 377
Smoking
434,395
Weight
135, 375
Alcohol,
Accidents,
Suicide
46,013
Unprotected Sex
Homicide
Drugs
Source: Personal Decisions are the Leading Cause of Death – Ralph L. Keeney, 2008
~2.4 M
Deaths
~1.3 M
Deaths
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10-20% Movement = Billions in Opportunity
$45B
$60B $30B
$45B
Patient Steerage
Drug Adherence
Disease Management
Missed Appointments
PwC
Does this really work?
PwC
Reducing Unnecessary ED Visits
• 10-20% of all ED visits are classified as non-urgent
• The cost to the healthcare system is $6 - $20 billion per year
• Universal coverage does not appear to be the answer
PwC
Reducing Unnecessary ED Visits
Issue
• Unusually high rate of Emergency Department visits by Medicaid members
Hypothesis – ED visits can be reduced through
• Proactive outreach to members immediately following an ED visit
• Ensuring members know how to reach their primary medical provider
PwC
Reducing Unnecessary ED Visits
5 month pilot program launched in Evansville, IN with ~10,000 Medicaid members
593
479
0
100
200
300
400
500
600
700
Monthly Visits Prior to Test Monthly Visits During Test
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Relative Choices
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Loss Aversion
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What does the future hold?
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More prevalence of Behavioral Economics in Healthcare
• As a means to “steer” consumers to specific treatment regimens
• As a way to reduce / control costs
• As a way to influence personal choice
• As a means to enhance population health initiatives
• As a differentiator for Health Insurance Exchange participants
• …