Behavioral econ for retirement, health care

Peter Orszag, Director of the Congressional Budget Office (CBO), recently spoke on how behavioral economics as applied to decisionmaking in savings and retirement can be applied to health care. Speaking on the Utility of Defaults, he said: "Inertia...is a powerful force in decisionmaking, so people tend to stick with a default, even when they can, at very low cost, pick another option." He analyzed the positive effect of automatic enrollment of workers in 401(k) plans.

According to Orszag, applying behavioral economics to health care has been limited because relatively little research and implementation have been carried out.

To reduce the amount of money spent on ineffective health care, we must first determine which procedures and treatments are effective....Incentives must be properly structured and made evident. Defaults must reflect expert knowledge and judgment about what choices will optimize the welfare of the typical individual but still allow individual choice.

Perpetuating inefficient health care, he said, are such factors as the lack of clarity in health insurance costs and the influence of doctors and other medical professionals on health decisions. However, "an even more important determinant than the health care system is an individual's behavior." Just as automatic 401(k) enrollment has narrowed the gap in savings between high and low socioeconomic groups, incentives can be used to narrow the socioeconomic gap in healthy lifestyles.

Behavioral Economics: Lessons from Retirement Research for Health Care and Beyond (pdf, 14pp/140kB), Aug. 7, 2008