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5500 Preparer's Manual for 2012 Plan Years

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CCH® BENEFITS — 6/24/08

Behavioral Economics Can Help Improve Health Care Quality And Costs, CBO Director Says

From Spencer's Benefits Reports: Behavioral economics represents an important tool to improve the efficiency of the health care delivery system and ultimately reduce health care costs, Peter R. Orszag, an economist and director of the Congressional Budget Office (CBO), recently told the National Academy of Social Insurance (NASI).

In a presentation entitled “Health Care and Behavioral Economics,” Mr. Orszag emphasized the urgent need to address the rapidly growing costs of health care, “the most important factor influencing the federal government’s budget trajectory.” According to CBO projections, if no changes are made, total spending for health care for the Medicare program will rise from 16% of the gross domestic product (GDP) in 2007 to 25% of the GDP in 2025 and to nearly half of the GDP in 2082. The primary driver of future Medicare costs is not the anticipated higher number of beneficiaries, but the increasing cost of treatment for each beneficiary, Mr. Orszag said.

Studies have shown that higher costs, as reflected in the great cost variation across geographic regions in the U.S., do not yield better outcomes, Mr. Orszag continued. Although the studies have revealed that higher cost areas are clustered around the top U.S. medical centers, even among these medical centers, there is significant variation in cost, but with similar quality scores. For example, the Mayo Clinic in Rochester, Minn., has the highest quality score among three medical centers, but its per-patient cost in the. last six months of life was significantly lower than those costs of the other two centers. Nearly 30% of Medicare costs could be saved with no negative effect on outcomes by reducing costs in the high- and medium-cost regions to the level of the low-cost regions, John Wennberg and colleagues from the Dartmouth Institute for Health Policy and Clinical Practice determined. Reducing even 5% of the current 16% of GDP spent annually on health care of questionable value represents $700 billion in annual savings, Mr. Orszag said.

Care variation is greatest when there is uncertainty on the best treatment, such as in the use of imaging and diagnostic tests, and on the appropriate setting, Mr. Orszag observed. Furthermore, overuse of abundantly available services and “social norms among local providers” appear to drive use of new technology. “One factor helping to perpetuate inefficiencies in health care is lack of clarity regarding the cost and incidence of health insurance, especially employment-based health insurance,” Mr. Orszag emphasized. Employees are not aware of the actual cost of employment-based health insurance, in terms of reduced wages or in actual cost of medical services—if they were, they would require greater efficiency in health care delivery, he said.

The following measures could improve the efficiency of delivery and reduce delivery of services of questionable value, Mr. Orszag suggested:


Another socially desirable strategy, even if it does not reduce health care costs, is to encourage individuals to pursue healthier lifestyles, Mr. Orszag continued. He suggested the following three policy approaches to change individual lifestyle behaviors:

  1. make available more information about consequences of unhealthy behaviors and contributing factors;
  2. provide financial incentives for healthier lifestyles and to discourage unhealthy activities; and
  3. establish “defaults” and take other steps to encourage healthy behaviors and discourage unhealthy ones—Mr. Orszag believes that this approach might be the most important one to affect behavior, especially for lower income and less educated groups among whom obesity and smoking are more prevalent. For example, healthier foods, and even exercise options, might be made more available and affordable, and with a more attractive presentation. He noted that people are more likely to exercise if the exercise facility is very close by or to walk to do their shopping if the shops are only a few blocks away.

“The underlying financial incentives continue to inform our analysis of how people respond to policy changes,” Mr. Orszag concluded. “But, at a minimum, contributions from behavioral economics can inform us about how people process the information and when their choices might be ‘predictably irrational.’”

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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