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September 23rd, 2008



Behavioral Economics:
Implications for an Aging
Population's Wealth & Health
Decisions

Anand S. R...
Agenda   |2




Agenda

What is Behavioral Economics (BE)?

What is the relevance of BE in Health/Wealth Decisions?

How c...
What is Behavioral Economics?   |3




Reflexive & Reflective Systems of the Brain




    REFLECTIVE SYSTEM              ...
What is Behavioral Economics?        |4




Rules of Thumb of our Reflexive System
                                       ...
What is Behavioral Economics?   |5




Behavioral Economic Principles: Anchoring

                                        ...
What is Behavioral Economics?   |6




Behavioral Economic Principles: Status Quo Bias

                                  ...
What is Behavioral Economics?         |7




Behavioral Economic Principles: Mental Accounting

                          ...
What is Behavioral Economics?        |8




Additional Behavioral Economic Principles

         Rule of Thumb             ...
Relevance of BE in Health/Wealth Decisions           |9



Behavioral policy interventions with respect to retirement savi...
Relevance of BE in Health/Wealth Decisions   | 10



In the absence of policy intervention Federal spending on healthcare
...
Relevance of BE in Health/Wealth Decisions   | 11



Slightly over 4% of the Medicaid enrollees account for close to 50% o...
Relevance of BE in Health/Wealth Decisions           | 12



Simple behavioral interventions can influence what people eat...
Relevance of BE in Health/Wealth Decisions   | 13



 Addressing more fundamental issues, such as medical malpractice tort...
Agent-Oriented Behavioral Modeling   | 14



Agent-oriented behavioral modeling and simulation offers a systematic
way of ...
Agent-Oriented Behavioral Modeling    | 15



Diamond's market research on baby boomer health and wealth
attitudes and beh...
Agent-Oriented Behavioral Modeling   | 16



The five segments are clearly differentiated in terms of their health conscio...
Agent-Oriented Behavioral Modeling   | 17



The five segments are also differentiated in terms of their financial confide...
Agent-Oriented Behavioral Modeling   | 18



Findings from Behavioral Economics, Market Research, and Predictive Analytics...
Relevance of BE in Health/Wealth Decisions   | 19



Simulating over 1,000 individuals as software agents helps determine
...
Agenda   | 20




Conclusions

 • Behavioral Economics embodies principles that explain the
  workings of the 'reflexive' ...
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Behavioral Economics In Healthcare

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Post-Conference presentation at the Predictive Modeling Summit held in Washington DC.

This talk focuses on applying behavioral economic principles to devise behavioral interventions and simulating such behavioral interventions using predictive modeling and agent-based simulation tools to provide managed care professionals and healthcare policy makers with a unique set of tools and techniques to address some of the critical issues of user adoption and controlling healthcare costs. In this talk, I examine the basic principles of behavioral economics, how it can be applied to devise behavioral interventions in the managed care area, and how to develop simulation models to understand the implications before testing and rolling out these interventions.

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Transcript of "Behavioral Economics In Healthcare"

  1. 1. September 23rd, 2008 Behavioral Economics: Implications for an Aging Population's Wealth & Health Decisions Anand S. Rao © Diamond Management & Technology Consultants, Inc. For more information contact: Anand S. Rao Partner Anand.Rao@diamondconsultants.com Mobile: 617.633.8354
  2. 2. Agenda |2 Agenda What is Behavioral Economics (BE)? What is the relevance of BE in Health/Wealth Decisions? How can we model, simulate, and implement behavioral change? © Diamond Management & Technology Consultants, Inc.
  3. 3. What is Behavioral Economics? |3 Reflexive & Reflective Systems of the Brain REFLECTIVE SYSTEM REFLEXIVE SYSTEM (Thinking) (Automatic) © Diamond Management & Technology Consultants, Inc. • People are Rational • People are Emotional • Driven by self-interest • Driven by social influence • Maximize utility • Averse to losses • Have unbounded resources • Have bounded resources Source: Diamond Analysis; Your Money and Your Brain by Jason Zweig
  4. 4. What is Behavioral Economics? |4 Rules of Thumb of our Reflexive System NOT EXHAUSTIVE MENTAL STATUS QUO ANCHORING ACCOUNTING BIAS HOT vs COLD ENDOWMENT RELATIVITY & STATES EFFECT CHOICE © Diamond Management & Technology Consultants, Inc. BANDWAGON LOSS HYPERBOLIC EFFECT AVERSION DISCOUNTING Source: Diamond Analysis; Nudge by Richard Thaler and Cass Sunstein; Predictably Irrational by Dan Ariely
  5. 5. What is Behavioral Economics? |5 Behavioral Economic Principles: Anchoring ANCHORING People start with a reference point and make (inappropriate) adjustments while answering questions and making choices 1. How Happy are you? 1. How often are you dating? © Diamond Management & Technology Consultants, Inc. 2. How often are you dating? 2. How Happy are you? CORRELATION: 0.11 CORRELATION: 0.62 Source: Nudge by Richard Thaler and Cass Sunstein
  6. 6. What is Behavioral Economics? |6 Behavioral Economic Principles: Status Quo Bias ‘STATUS QUO’ BIAS & POWER OF DEFAULTS People have a strong ‘status quo’ bias and often fail to take pro-active action to change the default Why is organ donation in Denmark below 5%, while in neighboring Belgium is • close to 100%? % of Population that Participates in Organ Donation © Diamond Management & Technology Consultants, Inc. 100% 90% 80% Percentage 70% 60% 50% 40% 30% 20% 10% 0% Country Source: Nudge by Richard Thaler and Cass Sunstein
  7. 7. What is Behavioral Economics? |7 Behavioral Economic Principles: Mental Accounting MENTAL ACCOUNTING Mental accounting is an internal control mechanism of the ‘reflexive’ part of the brain to compartmentalize complex decision-making Scenario A Scenario B Scenario C You have just won $30. You have just lost $30. You have just lost $30. Now choose between Now choose between Now choose between 1. A 50% chance to 1. A 50% chance to 1. A 33% chance to © Diamond Management & Technology Consultants, Inc. gain $9 and 50% gain $9 and 50% gain $30 and 67% chance to lose $9 chance to lose $9 chance to gain nothing 2. No further gain or 2. No further gain or loss loss 2. A sure $10 Choice 1: 70% Choice 1: 40% Choice 1: 60% Choice 2: 30% Choice 2: 60% Choice 2: 40% Source: Mental Accounting Matters by Richard Thaler in Journal of Behavioral Decision Making, 1999
  8. 8. What is Behavioral Economics? |8 Additional Behavioral Economic Principles Rule of Thumb Description People place a higher value on objects they own relative Endowment Effect to objects they do not Offering customers excessive options to choose from can result in purchase paralysis; People rarely choose Relativity & Choice something in absolute terms; they focus on the relative value amongst options People’s decisions under aroused or ‘hot’ states tend to be Hot vs Cold States significantly different from ‘cold’ calculated decisions © Diamond Management & Technology Consultants, Inc. People have a strong tendency to conform to the social Bandwagon Effect norms and often do things because others do People prefer avoiding losses rather than acquiring gains. Loss Aversion Studies suggest that losses are as much as twice as psychologically powerful as gains Consumption now and in the near future is preferred to Hyperbolic consumption into the farther future; The greater the Discounting uncertainty about this future the less the preference Source: Diamond Analysis; Nudge by Richard Thaler and Cass Sunstein; Predictably Irrational by Dan Ariely
  9. 9. Relevance of BE in Health/Wealth Decisions |9 Behavioral policy interventions with respect to retirement savings is showing early signs of 'nudging' consumers towards higher savings rate Employee-Weighted Participation Rate BE Interventions (Post-PPA) 1. Pension Protection Act (PPA) 2006 % of Employees 86% • Automatic enrolment of employees in 401(K) with explicit opt-out instead of 45% voluntary opt-in (Default) • Automatic increase of the percentage of salary directed to the plan (Pre- commitment) Hired Under Voluntary Hired Under Auto-Enrollment Enrollment • Default investment into three broadly diversified investments – balanced Median Contribution Rate (Post-PPA) funds, lifestyle funds, and managed © Diamond Management & Technology Consultants, Inc. % of Salary Contributed accounts (Choice) 2. Save More Tomorrow (SMaRT) 5% • Employees pre-commit to increase in 2.90% 2.60% contributions well before their 0% scheduled pay increases or bonus payment (Pre-commitment, Loss Participant-Weighted Employee-Weighted Aversion) Hired Under Voluntary Enrollment • Employees can opt-out at any time Hired Under Auto-Enrollment (Default) Source: Diamond Analysis, Measuring the Effectiveness of Automatic Enrollment, Vanguard Center for Retirement Research
  10. 10. Relevance of BE in Health/Wealth Decisions | 10 In the absence of policy intervention Federal spending on healthcare will rise from 16% of GDP in 2007 to 25% of GDP in 2025 © Diamond Management & Technology Consultants, Inc.
  11. 11. Relevance of BE in Health/Wealth Decisions | 11 Slightly over 4% of the Medicaid enrollees account for close to 50% of the Medicaid expenditure © Diamond Management & Technology Consultants, Inc.
  12. 12. Relevance of BE in Health/Wealth Decisions | 12 Simple behavioral interventions can influence what people eat and how much they eat OBESITY BE Interventions 1. Placing candies three feet away from one’s desk reduced volume of 31% chocolate consumption by 5 to 6 chocolates a day (Self-control) 15% 2. Subjects provided with a bowl of M&Ms in 10 colors ate 77% more than people given a bowl with only 7 colors (Visceral effects) 3. Food stamp benefits raise food <20 yrs 20-74 yrs expenditure more than an equal © Diamond Management & Technology Consultants, Inc. amount in cash (Mental Accounting) 1. Obesity causes at least 300,000 excess deaths 4. Pre-ordered healthy-pack options encouraged healthy eating by Food 2. Obesity in adults resulted in health Stamp Beneficiaries in Connecticut and care costs of $93 billion in 2002 North Carolina (Defaults) 3. Lifetime costs related to diabetes, 5. Having more unhealthy choices heart disease, high cholesterol, reduces the chances of health options hypertension and stroke among being selected – Salad, Hamburger, obese are $10,000 more than the Cake vs Salad and Hamburger (Choice non-obese Relativity) Source: Could Behavioral Economics help improve Diet Quality for Nutrition Assistance Program participants, USDA, Economic Research Service, Diamond Analysis
  13. 13. Relevance of BE in Health/Wealth Decisions | 13 Addressing more fundamental issues, such as medical malpractice tort costs may require policy interventions by Government BE Interventions MEDICAL MALPRACTISE COSTS (in $Bn) 1. Unbundle healthcare premiums to include cost of 30.3 29.4 28.2 medical malpractise 26.5 litigations (Accessibility 24.2 and Salience) 21.7 19.6 17.9 2. Health insurance companies 16.4 15.5 must be permitted to offer 14.1 13.3 12.5 11.5 plans with and without the 10.6 10.1 9.2 right to sue for negligence 8.5 7.6 7.3 6.9 6.8 6.7 (Choice) 5.8 4.8 © Diamond Management & Technology Consultants, Inc. 4.1 2.7 3.4 2.2 1.8 1.4 3. Make ‘waiving’ the right to 1.2 sue as the default and retaining the right would 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 1. Medical malpractice tort costs have increased 229% cost more (Defaults) between 1990 and 2006 4. Change the ‘right to sue’ 2. Annual rate of increase is 11.1% since 1960 only for intentional or compared to 8.2% for all other tort causes reckless wrongdoing and not for negligence to reduce 3. Exposure to medical malpractice liability is around malpractise premiums 5-9% of hospital expenditures Source: Diamond Analysis; Insurance Information Institute; Nudge by Richard Thaler and Cass Sunstein
  14. 14. Agent-Oriented Behavioral Modeling | 14 Agent-oriented behavioral modeling and simulation offers a systematic way of designing and implementing behavioral interventions Agent-Oriented Behavioral Modeling & Simulation Feedback Loop Feedback Loop Behavioral Behavioral Economics Intervention - 1 Understand ‘reflexive’ BE principles that determine health and wealth Behavioral decisions Agent-Oriented Intervention - 2 Behavioral Modeling & Simulation Modeling consumer Market beliefs, desires, and Research © Diamond Management & Technology Consultants, Inc. behaviors to simulate Understand consumer different scenarios and beliefs, aspirations, evaluate impact of attitudes, behaviors, and consumer health/wealth demographics decisions on physical and financial well-being Predictive Analytics Use multiple data sources (diagnostics, prescription, Behavioral demographics) to predict Intervention - n risk groups and costs Source: Diamond Analysis
  15. 15. Agent-Oriented Behavioral Modeling | 15 Diamond's market research on baby boomer health and wealth attitudes and behaviors identified five significant clusters of consumers Low Financial Confidence High Financial Confidence High Health Consciousness High Health Consciousness Aspirants Moderates 31% 24% (56yrs/ (62yrs/ $50K) $98K) 20% Affluent (57yrs/ Percent of Sophisticates $31K) population 15% Avg. Age/ (66yrs/ Avg. Income $50K) © Diamond Management & Technology Consultants, Inc. Retired Settlers Survivors 10% (57yrs/ Low Financial Confidence High Financial Confidence $24K) Low Health Consciousness Low Health Consciousness Source: Diamond Retirement Study, 2008
  16. 16. Agent-Oriented Behavioral Modeling | 16 The five segments are clearly differentiated in terms of their health consciousness (e.g., regular exercise, health insurance cover, health risk during retirement) Increasing Health Consciousness Affluent Retired Settlers Survivors Moderates Aspirants Sophisticates % who exercise at least 3 hours a week 49% 30% 29% 27% 15% 84% % who strongly agree that they have adequate health insurance © Diamond Management & Technology Consultants, Inc. 60% 50% 23% 17% % who ranked physical health as most at risk during retirement 71% 63% 42% 39% 26% Source: Diamond Retirement Study, 2008
  17. 17. Agent-Oriented Behavioral Modeling | 17 The five segments are also differentiated in terms of their financial confidence (e.g., financial preparedness for retirement and healthcare issues, longevity risk) Increasing Financial Confidence Affluent Survivors Aspirants Retired Settlers Moderates Sophisticates 82% % confident of being financially prepared for retirement 57% 22% 3% 0% 76% % confident of being financially prepared for healthcare issues that arise later in life © Diamond Management & Technology Consultants, Inc. 43% 19% 10% 1% % who ranked finances as most at risk during retirement 62% 51% 47% 31% 17% Source: Diamond Retirement Study, 2008
  18. 18. Agent-Oriented Behavioral Modeling | 18 Findings from Behavioral Economics, Market Research, and Predictive Analytics can be combined to model individuals as software agents Agent-Oriented Modeling Example: Cardiovascular Disease • Informational state • Demographic data • Facts about the world • Beliefs about diet & exercise • Beliefs about other • Impact of diet & exercise on cholesterol, Beliefs agents stroke, etc. • Current diet and exercise behaviors • Social influence on beliefs • Motivational state • Diet and exercise goals • Committed desires are • Level of commitment or self-control to Desire/ goals goals Goals © Diamond Management & Technology Consultants, Inc. • Social influence on • Impact of social influence on goals individual goals • Deliberative state • Patterns of different diet and exercise • Commitment to abstract patterns (e.g., regular vs sporadic) Intentions sequence of goals or • Varying impact of diet and exercise on specific actions cardiovascular events – stroke, Myocardial infraction (MI), etc. Behaviors of thousands of consumers can be modeled and simulated to evaluate impact of behavioral interventions on individual well being as well as healthcare costs Source: Diamond Analysis
  19. 19. Relevance of BE in Health/Wealth Decisions | 19 Simulating over 1,000 individuals as software agents helps determine the impact of behavioral interventions on total cost and well being © Diamond Management & Technology Consultants, Inc. Source: Diamond Analysis; AnyLogic Simulation
  20. 20. Agenda | 20 Conclusions • Behavioral Economics embodies principles that explain the workings of the 'reflexive' brain and help in developing interventions to change our behaviors • Behavioral Economics principles are being successfully used to change how people make decisions with respect to their health and wealth © Diamond Management & Technology Consultants, Inc. • Combining predictive modeling and behavioral intervention already practised within the healthcare sector, with agent-based behavioral modeling offers a unique way to model, simulate, and implement behavior changes
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