The limits of behavioral economics

Tyler Cowen and Mark Thoma get credit for drawing my attention to George Loewenstein’s and Peter Ubel’s NY Times column on the limits of behavioral economics (the former is one of the pioneers of the field). About health reform, they write,

The act promises to achieve the admirable goal of insuring most Americans, yet it fails to address the more fundamental problem of health care costs. Instead of requiring individuals to pay out of pocket if they choose to receive expensive and unproven interventions, the act tries to lower costs by promoting incentive programs that reward healthy behaviors.

Prevention is certainly a worthy goal; it is much better to prevent a case of lung cancer than to treat it. But efforts to improve public health, even if enhanced by insights from behavioral economics, are unlikely to have a major impact on health care costs. Studies show that preventive medicine, even when it works, rarely saves money.

I agree with these words. I worry slightly about the tone, and this is something that concerns me in my own writing as well.

The ACA is first and foremost a (near) universal coverage law. Though it was touted by proponents as a cost reduction law as well, it only has provisions in it that have a good chance of reducing the costs of public payers. It’s really not principally about reducing private-side costs (commercial market premiums) because it’s not really about reducing private-side provider prices or reforming private-side payment systems, which are predominantly fee-for-service.

Outside of Medicare and Medicaid, we’ll get what the market produces within the constraints of regulation. That regulation is changed somewhat by the law, but not in ways that are likely to reduce prices or volume substantially. The market does what the market is. We haven’t seriously changed what the market is and we have a long history of witnessing what it does. Premiums go up, up, up.

Nevertheless, I think the ACA is a good law. I’m glad it passed. I wish it had more private-side cost reduction provisions in it, but substantial ones are not politically viable yet. Witness what happened to the Cadillac tax, the only major provision that directly targets commercial market (employer-based) premiums. It’s delayed and watered down from its original form. It won’t kick in for eight years and won’t make a substantial dent for a decade or so after that, if at all. At least the ACA has something in it about costs (mostly public, a tiny bit private).

So, I want to make a clear distinction between supporting the ACA and advocating for more reform that focuses on cost. This is not an inconsistent position. In fact, passage of the ACA makes more reform more likely. My view is that providing access to affordable coverage to all Americans as soon as possible is the right thing to do. That’s what the ACA principally does.

But make no mistake, we still have a cost problem. The ACA is insufficient to tackle it.

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