Traditional economic theory relies on the fundamental assumption that economic agents make rational choices, seeking always to maximize the utility of information.
In practice, this does not always hold true and two examples illustrating that departure from rationality would be as follows:
People tend to favor short-term actions over long-term implications and people tend to rely on decision-making shortcuts, rather than detailed analysis, to drive much of their behavior.
In other words, consumers’ motivations can be complex and decisions are often emotionally driven. Health is an area where bad decisions routinely made over years can lead to predictably bad, or even fatal, outcomes. Efforts to influence those decisions sometimes succeed – such as public anti-smoking campaigns motivating consumers to quit the habit. Still, many fail, with tangible consequences for insurers.
To account for this reality, there has been an increase in the adoption of behavioral and psychological concepts into economic models.
Behavioral economics (BE) fuses psychology and economics to gain a better understanding of human behavior and decision making. It is worth contemplating the ways BE can shed new light on public health and private medical insurance.
Insights from BE to Explain Irrational Behavior
Most people would agree that good health or partaking into good health behavior is important to them, yet there are many examples where it does not take priority.
Take for instance, those who engage in cigarette smoking and drug abuse are probably aware of the harmful impact it has on their health. However, the pleasure of using outweighs the fear of a painful early death in the user’s mind. A purely rational person may make different choices.
In order to put context around the above examples, we can harness some of the most prominent BE concepts:
- Present bias, also known as "hyperbolic discounting," refers to the concept that people tend to prefer short-term low payoffs as opposed to long-term higher payoffs. For example, the decision to live a sedentary lifestyle and consume a bad diet in the hope that there will be improvements in medicine over the long run is also reflective of present bias.
- Framing bias. Suppose we set out the following question: Which is better? Odds of survival following surgery at 90% or risk of death following surgery at 10%? As a matter of fact, both statements capture the same information and convey the same message. However, the way they play out in the minds of people is not the same. People tend to be loss averse when it comes to their own health.
- Optimism bias suggests that people tend to overestimate positive outcomes and underestimate negative outcomes, meaning that they perceive the positive outcomes as being more probable and negative outcomes to be less probable than the reality.
- Herding bias is associated with the idea that people are more likely to follow collectively on an idea that appears positive because they do not want to seem argumentative or be singled out as an outlier.
- Affect heuristics. People’s decisions are often influenced by what they think they know as opposed to what they really know. Behavioral economists refer to these situations as heuristic decision making, and when these decisions are swayed by emotion, we get affect heuristics. This lends to sub-optimal choice due to failure to draw the line between risk and feeling. Another example of affect heuristics would be what academics refer to as "willful ignorance." This refers to avoidance, or deliberately ignoring information that may have adverse implications.
Implications for Health Insurers
A wide range of biases affect human decision making. However, a carefully laid out behavioral strategy, when built into product designs and sales, underwriting and claims processes, could go a long way towards inducing positive patient behavior, enhancing customer engagement and delivering improved health outcomes in the long run.
The fundamental tools through which BE would usher in decision-making changes are through development and deployment of "nudges" – or subtle steps taken to tilt the thinking of economic agents so that they make better choices.
Typically, health insurers will leverage insights from BE to enhance product design, sales and marketing strategies, medical underwriting and claims. Consider the following applications:
Product design
- Product designs could be amended to include ‘opt out’ rather than ‘opt in’ options as these tend to trigger more positive reactions.
- Studies have shown messages conveying possible gain are more effective at preventing behaviors while messages that relay possibility of loss are more effective at encouraging positive, protective actions, such as undergoing disease detection screenings.
Claims management and healthcare delivery
- Nudging could also be used to guide/encourage members to adopt telehealth as a model for healthcare delivery not requiring detailed screening such as prescription refill consultations. For example, a system of points akin to airline reward system can be deployed.
- Likewise, guiding members towards certain lower cost providers for a selected range of diseases may be done using a similar technique to lower costs.
Sales and marketing
- Insurance call center personnel can more effectively nudge customers and improve conversion ratios when these agents have a strong understanding of the cultural expectations, communication styles and preferences of the target customer base. For example, most skilled salespeople use relatable examples to bring risks to life for potential customers. They play on the affect heuristic, perhaps unconsciously, because the approach works.
Underwriting
- To encourage true statements in medical application form, insurers may propose to enroll those members who declare pre-existing and chronic conditions into a suite of programs automatically. In addition, studies have shown that disclosure rates can be improved by changing the question design.
- Asking customers to provide a short video of their existing health condition as part of medical declaration form has been found to be effective in improving member declaration form authenticity in certain cases.
- Similar techniques applied to ‘out of network’ (reimbursement) medical claims have been found to be effective at reducing likelihood of false claims and encouraging members to shift to a lower-cost setting.
Digitalization
- Deploying nudging techniques through digital apps as a better way of consumer engagement can also be effective. Some studies suggest reminders, when worded correctly, can motivate positive actions.
- Likewise, smartphone apps that show more and more people enrolling into health activities or doing something to improve their health, will go a long way towards applying the ‘social proof’ theory – that people are nudged heavily by what others do.
- Insurers can consider a program of rewards for verifiable health milestones such as discounted gym memberships, discounts for selected healthy food purchases or free enrolment into a health-related magazine or free diet consultation and advice.
Ratings
- Perhaps the greatest nudge could come from premium reduction or a cashback program upon achievement of certain verifiable targets such as BMI and related metrics. Monetary benefits or rewards can be powerful behavioral inducers.
Specific to the Middle East
Health insurance in the region is an employee benefit in which each employer primarily assumes responsibility for paying premiums on behalf of his or her employees. Because healthcare is perceived to be a ‘free’ good, employees have fewer economic incentives to take responsibility for personal health decisions or to make positive lifestyle changes.
Therefore, the lessons of BE should be applied not only to insured members, but also to the decision makers that buy health insurance policies, creating shared incentives.
