QUALITY: Nudge Report

Behavioral economics is the new "it" specialty of the dismal science. Economist Richard Thaler and law professor Cass Sunstein hope to bring it to the masses with a vision they call "libertarian paternalism," laid out in a book they smartly call Nudge: Improving Decisions about Wealth, Health and Happiness. We heard Thaler and Sunstein discuss their work at AEI last week.

As a practice, behavioral economics tries to provide a more complete picture of the way humans act—particularly the way we make economic decisions. (It's what happens when economists stop being neoclassical and start getting "real"). Humans are imperfect; we're influenced by the way things are framed and by the status quo. We make decisions we regret and would later change if we could. While seemingly simple observations, they are often lacking in economic models and can have important consequences for the way we think about health and health reform. Everyone wants to live healthier, and even the "young immortals" who can afford insurance but choose not to because they're 25, wish they had it when they break a leg in Breckenridge.

Recognizing the imperfection of our decision-making, Thaler and Sunstein argue that improvement can come through changing the environment in which we make choices—what they call choice architecture—in ways that preserve an individual's freedom to choose (libertarian) while encouraging that individual make what he would define as the better decision (paternalism).

Their argument is certainly provocative with potential applications for everything from the way mortgages are structured to the way urinals are designed. In the arena of health, Nudge makes some interesting proposals for Medicare, organ donation, and medical malpractice. We were particularly intrigued by the Destiny Health Plan: "a clever effort to combine health insurance with nudges designed to get people to live healthier lives" by offering members "Vitality Bucks" for completing healthy activities that could then be spent on rewards like plane tickets or iTunes.

But Thaler and Sunstein are notably silent on the real elephants in the room when it comes to health care in the United States; things like the 47 million uninsured in this country, the $2.2 trillion we spend each year (much of which is waste), or the fact that as many as 98,000 Americans die each year due to preventable medical errors.

In Nudge, Thaler and Sunstein aptly describe some of the problems inherent in our current health care system writing:

"Many markets (and choice architecture systems) are replete with incentive conflicts. Perhaps the most notorious is the U.S. health care system. The patient receives the health care services that are chosen by his physician and paid for by the insurance company, with everyone from equipment manufacturers to drug companies to malpractice lawyers taking a piece of the action. Those with the different pieces have different incentives, and the results may not be ideal for either patients or doctors. ... Do the choosers actually notice the incentives they face? In free markets, the answer is usually yes, but in important cases the answer is no."

Libertarian paternalists are fans of nudges, non-intrusive features of an environment that can have big impacts on people's behavior. They're not fans of bans and mandates, but Thaler and Sunstein concede such interventions may be necessary in cases that have third-party effects or involve children. To us, that sounds like a nice nudge toward comprehensive health reform because changing behavior in a system as fragmented and complicated as U.S. health care requires changing the rules of the game. It means resetting the defaults to a system where all Americans are covered, where doctors are paid for the quality of care they deliver, and Insurers have incentives to find value in promoting the health of their enrollees and not selecting a healthy risk portfolio.