Behavioral economics meets healthcare. PriceWaterhouse Cooper

1. www.pwc.com/diamond
Consumer-Centric
Health:
Models for Change '11
Behavioral Economics Meet Healthcare
October 2011
Tom Weakland – Enterprise Strategy & Conversion, Health Industries Advisory

2. What is Behavioral Economics?
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3. PwC

4. Behavioral Economics is the application of neo-
classical economics and psychology to explain
irrational* behavior
Neoclassical
Economics • People are rational and driven by self-
interest • Identifies common
• People make decisions which “shortcuts” used in
maximize their own economic utility consumer decision-
making
• Assumptions break down when
humans do not consider decisions in
unemotional, strictly rational terms • Explains external
variables affecting
+ Cognitive
Psychology
• Decision-making is affected by
consumer decision-
making
• Explains market
inefficiencies
environmental influences
• Provides explanations as to why • Offers insights into
people’s decisions differ from classical product design and
economic predictions marketing
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*Behavior not predicted by traditional economic theory (typically attributable to cognitive biases, limitations in knowledge/cognitive ability, or psychological / environmental factors)

5. Behavioral Economics – Our Framework
Behavioral economic principles can be classified
into four broad categories
• 1.1 Relative Choices • 2.1 Love of Free
• 1.2 Reliance on Defaults • 2.2 Anchoring
• 1.3 Attribute Priming • 2.3 Endowment Effect
• 1.4 Mental Accounting • 2.4 Hyperbolic Discounting
• 1.5 Framing
1. Decision 2. Value
Short-cuts Assessments
3. Social 4. Emotional
Impacts Impacts
• 3.1 Social/Financial • 4.1 Loss Aversion
Domains • 4.2 Self-Herding
• 3.2 Dishonesty Effect • 4.3 Self-Control Facilitation
• 3.3 Signaling • 4.4 Hot vs. Cold States
• 3.4 Bandwagon Effect • 4.5 Overconfidence Effect
• 4.6 Risk Aversion
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6. Behavioral Economics - Cross-Industry Behavioral
Economics Perspective – 1. Decision Shortcuts
Defaults
Organ Donation by Country
Higher Percentage
of Organ Donors
100
% Organ Donors
80
60
Lower Percentage
of Organ Donors
40
20
0
PwC
Retirement Research Consortium, August 2008

7. Relative Choices
Is This Expensive?
Signature 6 Burner BBQ
$5,984.05
PwC 1Predictably Irrational, Dan Ariely

8. Behavioral Economics
Principles
Relative Choices
Is This Expensive?
Signature 6 Burner BBQ
$5,984.05
$6,299.00
PwC 1Predictably Irrational, Dan Ariely

9. Behavioral Economics
Principles
Relative Choices
Is This Expensive?
Signature 6 Burner BBQ Signature 6 Burner BBQ: Gold Plated Edition
$5,984.05 $12,500.00
$6,299.00
PwC 1Predictably Irrational, Dan Ariely

10. Behavioral Economics
Principles
Love of Free
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1Bloomberg Businessweek, Stone 2010

11. Behavioral Economics
Principles
Love of Free
Prime members increase purchases by
150% and account for 20% of all
Amazon purchases1
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1Bloomberg Businessweek, Stone 2010

12. Why is Behavioral Economics
Relevant to Healthcare?
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13. 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
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14. 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
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15. Poor Behavior and Choice Kills
~2.4 M
2,500,000 Deaths
2,000,000 135, 375
453, 377 Alcohol,
Smoking Accidents,
Suicide ~1.3 M
1,500,000 Deaths
434,395
Weight
46,013
Unprotected Sex
1,000,000 Homicide
Drugs
500,000
0
Source: Personal Decisions are the Leading Cause of Death – Ralph L. Keeney, 2008
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16. 10-20% Movement = Billions in Opportunity
Patient Steerage
$45B $45B Drug Adherence
Disease Management
$30B
$60B Missed Appointments
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17. Does this really work?
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18. 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
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19. 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
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20. Reducing Unnecessary ED Visits
5 month pilot program launched in Evansville, IN with
~10,000 Medicaid members
700
600
593
500 479
400
300
200
100
0
Monthly Visits Prior to Test Monthly Visits During Test
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21. Relative Choices
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22. Loss Aversion
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23. What does the future hold?
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24. 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
•…
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