Increased and Decreased Utilization: The Recession Driven Paradox and Behavioral Economics

by Clive Riddle, April 23, 2009

Here’s two headlines from the past week:

• Thomson Reuters Study Finds More Patients Postponing Medical Care Due to Cost
• As Employers Cut Health Care Costs, Employees Increase Utilization

So how does one reconcile the Thomson Reuters report that “20 percent of U.S. households postponed or cancelled care in the past year,” with the International Foundation of Employee Benefit Plans (IFEBP) survey that found “plan participants, perhaps fearing an impending layoff, are increasing utilization of their benefits”?

It’s quite easy actually, when you overlay the employees “fearing an impending layoff” from the IFEHBP survey with this finding from the Thomson Reuters study: “the percentage of households with employer-sponsored insurance showed a notable decline since the start of the recession, declining from 59 percent in early 2008 to 54.6 percent in early 2009.” We have one sector, fueled by those without coverage, that are delaying care greatly influenced by cost concerns, and another sector, fueled by covered employees uncertain about their future employment, that are accelerating their care while they still have coverage.

Behavioral economics would kick in here as we reconcile this on-the-surface paradox. Let’s consider a few Behavioral Economics concepts:

• Status Quo (Default) Bias: People have a strong ‘status quo’ bias and often fail to take pro-active action to change the default
• Hot vs Cold States: People’s decisions under aroused or ‘hot’ states tend to be significantly different from ‘cold’ calculated decisions
• Loss Aversion: People prefer avoiding losses rather than acquiring gains. Studies suggest that losses are as much as twice as psychologically powerful as gains
• Hyperbolic Discounting: Consumption now and in the near future is preferred to consumption into the farther future; The greater the uncertainty about this future the less the preference

One could argue that the Status Quo default is to receive a service when it is prescribed by a doctor, and to not receive a service when it hasn’t been prescribed or referred by a provider. One could also argue that a person that has lost, or perceives they will lose their health coverage, is in a ‘hot state’, and that persons told by their doctor they require services are in a ‘hot state.’

We can apply these assumptions in the following table of how consumer decisions fit the two survey scenarios, along with another scenario of those lucky enough not to be worried about their health care coverage. We would imply that “self referred” means you are contemplating a service that hasn’t been prescribed, maybe triggered by some direct to consumer advertising, advice from a friend, internet research or other such information.

Service:	Lack Coverage	Fear Losing Coverage	Stable Coverage
Self referred elective potential service	Default: No service State: Hot Decision: Won’t move from default due to dollar/time loss aversion and hyperbolic discounting that dollar savings today is greater than future health benefit	Default:No service State: Hot Decision: Will move from default due to covered benefit loss aversion and hyperbolic discounting that value of covered benefit and health service today is greater than future considerations	Default: No service State: Cold Decision: Won’t move from default because there are low loss aversion considerations and value of health benefit is no greater now than in the future
Provider referred/ prescribed elective potential service	Default: Receive service State: Hot Decision: Will move from default due to dollar/time loss aversion and hyperbolic discounting that dollar savings today is greater than future health benefit	Default: Receive service Decision: Won’t move from default due to covered benefit loss aversion and value of covered benefit and health service today is greater than future considerations	Default: Receive service State: Hot (health need) Decision: Won’t move from default because there are low loss aversion considerations and value of health need is greater now than future considerations
Any service perceived or actually considered to be non-elective	Default: Receive service State: Hot Decision: Will move from default only if dollar/time loss aversion exceeds health loss aversion and hyperbolic discounting that dollar savings today is greater than future health benefit	Default: Receive service Decision: Won’t move from default due to covered benefit loss aversion, health loss aversion and value of covered benefit and health service today is greater than future considerations	Default: Receive service State: Hot (health need) Decision: Won’t move from default because of high health loss aversion and value of health need is greater now than future considerations

The Thomson Reuters Study validated that many people will postpone care for other reasons than cost, but cost has moved to the top of the list: They found that: “One in five U.S. households postponed or cancelled medical care over the past year, up from 15.9 percent in 2006 when the survey last addressed this issue. Among 2009 respondents who postponed or cancelled care, 24.1 percent said cost was the primary reason. In 2006, the primary reason cited was lack of time......The majority of postponed services (54.7 percent) were for physician visits, followed by imaging (8 percent), non-elective procedures (6.3 percent), and lab or diagnostic tests (5.7 percent).”

The full Thomson Reuters Study is available on the Thomson Reuters website.