Replacing the Affordable Care ActLessons From Behavioral Economics

Jonathan S. Skinner, PhD¹; Kevin G. Volpp, MD, PhD²

Sticks work better than carrots in economic terms but are politically damaging.

Republican efforts to replace the Affordable Care Act (ACA) are not over, despite the failure of the American Health Care Act (AHCA) legislation. The major challenge facing the AHCA was the loss of insurance coverage for an estimated 24 million people.¹ Any subsequent reform, especially those less costly than the ACA, will have the same challenge of keeping currently insured individuals and households from discontinuing their insurance. In this Viewpoint, we draw on behavioral economics to propose 4 general principles for health insurance reform to help ensure that the currently insured will not lose their coverage.

Incentives for Healthy Individuals

In insurance markets, healthy people subsidize people with acute and chronic disease and other health conditions. Insurance is still valuable for healthy people, because they need not be concerned about the risk of no insurance coverage in the event of unexpected injuries or acute health events. However, there is often a tendency to minimize those future risks and use the money now for more pressing concerns rather than signing up for expensive insurance. Once enough healthy people no longer elect to enroll in and purchase health insurance, a major challenge occurs, with rising premiums and the eventual collapse of insurance markets.

Incentives to encourage healthy individuals to sign up for health insurance can be described as either carrots or sticks. The ACA has both carrots (refundable tax credits) and a stick—the mandate—to ensure that healthy persons purchase insurance. Granted, the stick was not always effective; initially the amount was too small, and the penalty is too far in the future. But it was widely credited with increasing enrollment by overcoming “present bias,” the idea that potential future medical costs are discounted too much when compared with having to write a check for insurance premiums today. By contrast, current proposals rely almost entirely on carrots—tax credits for enrollees.

Behavioral Economics Principles

The first principle from behavioral economics research is that carrots do not work nearly as well as sticks; $2 in subsidies induces approximately the same behavioral response as $1 in penalties.² Furthermore, subsidies drain money from the federal treasury, whereas sticks bring in more revenue.

A second behavioral economics principle involves instant gratification; paying significant premiums means that something is received in return. Bare-bones or catastrophic plans, along with health savings accounts, do not do well from the perspective of instant gratification. Aside from the relatively few families who benefit from receiving catastrophic care, the vast majority of people do not experience any “immediate gratification” from paying those premiums, because they never reach the catastrophic cap. Even current enrollees in bronze high-deductible plans wonder why, after paying substantial premiums, they still are responsible for burdensome deductibles and co-pays.

People’s tendency to focus on immediate gratification also has important implications for the continuous coverage requirement in the AHCA. This requirement is a stick but is unlikely to work. Under this provision, if an individual who did not purchase insurance coverage now or who lets current insurance coverage lapse, would have been subject to a 30% penalty to sign up again. It is unlikely that young invincibles, young healthy people who see themselves as invulnerable who have been ignoring health insurance up until now, will suddenly become concerned about their ability to buy insurance many years down the road. Furthermore, the 30% stick would have discouraged uninsured people from buying insurance—precisely the opposite effect of the mandate.

Failure inevitably brings analysis and theory...neither of which can guarrantee success on the next go-a-round.

Replacing the Affordable Care Act | Health Care Reform | JAMA | The JAMA Network