Daniel Kahneman Can Solve The Healthcare Problem

I’ve been familiar with the work of Daniel Kahneman since my freshman year at M.I.T.,  where we studied his experiments in the equivalent of Psych 101 (MIT called it 9.01, ’cause we do everything with numbers).    Kahneman’s “Thinking Fast and Slow” received a lot of positive press last year: well deserved for its explanations of many cognitive biases we hold.

One of the biases Kahneman described involved our attitudes toward money and spending:  if we’re given a $15,000 gift, we view “value” differently than if we were given $15,000 and bought the gift ourselves.   I’m not sure exactly what name Kahneman gave this “bias,” but you can think about how you might say “oh yeah – I really like that watch that I got for my birthday, but I wouldn’t want to spend my own money to buy it.”

Which brings me to my topic of the month: healthcare.    The $15,000 “gift” I alluded to above is the health insurance benefit that your employer might provide you.   My thesis is that a major reason health insurance is so expensive is because so few people pay for their own insurance.   Yes – of course – when your employer gives you insurance as a benefit, you’re “paying” for it indirectly, but this is where the cognitive biases come in.     I am quite confident that Professor Kahneman could design an experiment that would demonstrate that if instead of paying for these massively expensive employer-sponsored plans, employers gave their employees cash (less than they paid for the plan, even), and had employees buy their own health insurance, the price employees were willing to pay would be lower than the price that the employers paid.

In other words: once we have the money in our pockets – even though it’s an additional “bonus” compared to what we were making before, we take more “ownership” of it and are more sensitive to the costs.

Here’s a simple example:  I was talking to some friends recently.  This is a married couple, each of whom is roughly 55 years old.  They have 2 children in their early 20s.   They get health insurance from the woman’s job: she works “at a law office.”  I don’t know exactly what she does, but I’m fairly certain she’s not a $ 300k/year lawyer.   Their insurance plan costs $1700/month, and they also have a $6000 annual deductible.   The employer pays the entire $1700/month, and they pay the first $6000 in care costs.   I have no idea what this woman makes, but let’s say it’s on the order of $ 50k/year.   The health insurance premium benefit that the employer pays is worth $20,400 / year (let’s just ignore potential tax benefits for both sides?).

My hypothesis is this:  If this woman, being paid $50,000 a year, was told, “next year we’re going to give you a raise to $70,000, but you have to buy your own health insurance,”  I have no doubt that the resulting “tolerance” for cost of health insurance would be lower than the amount of the raise, and probably significantly so.   Giving people more of a “stake” in their care would result in lowering of costs as consumers demanded it*.

It’s not exactly that no one cares about the costs right now, but in some sense, it really is:  there are far too many people who have no idea or appreciation of the costs of their premiums and care, and the system cannot be reformed until everyone has a stake in their own care and demands value for their dollar.

related:

“Affordable” Health Care

I Have Solved National Healthcare

The President Lied To Me – ACA Edition

Health Insurance Needs Reform

My Health Insurance Bill Just Increased By 48%

-KD

*of course, you have to allow firms to compete to meet these demands.  As I’ve noted previously, a major problem with healthcare is that it’s regulated just enough to completely screw it up and preserve monopolies.

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