Incentives and Value-Based Insurance Design

1. Incentives and Value-Based Insurance Design University of Michigan VBID Conference November 16, 2011 Kevin Volpp, MD, PhD Department of Health Care Management Center for Health Incentives and Behavioral Economics, Leonard Davis Institute University of Pennsylvania School of Medicine CHERP, Philadelphia VA Medical Center

2. People are ‘humans’ not ‘econs’ Econs: Rational expected utility maximizers Not affected by emotions Humans (decision errors): Immediate gratification Loss averse Overly optimistic Self control problems • People respond to prices but other factors important • Adapted from Thaler and Sunstein, Nudge, 2009

4. Typical plan design. . . • A lot of effort goes into plan design • Complicated maze of copayments, deductibles, coinsurance, maximum out of pocket, dollar limits, visit limits, allowances, flexible savings accounts, health reimbursement accounts, health savings accounts, personal benefit allowances. . . • Do we really think the average person understands what they are being incented to do? • Plan designs are way too complicated ((which may make efforts to use price less effective)

5. A tale of two programs.. • Problem: Low and moderate-income families don’t participate in tax-protected savings plans at high rates • Solution 1: Saver’s Credit, enacted 2001 • Federal income tax reduction up to 50% of funds contributed to IRA • Equivalent to 100% match for lowest income group • Solution 2: Savings Match, tested in 2005 • Clients preparing tax returns at 60 H&R block offices assigned to one of three match rates for IRA contributions: • zero (control group) • 20% • 50% Sources: Duflo et al., “Savings Incentives For Low- And Moderate Income Families In The United States: Why Is The Saver’s Credit Not More Effective?”; Duflo et al., “Saving Incentives For Low- and Middle-income Families: Evidence from a Field Experiment With H&R Block”

6. Programs had radically different results: Duflo et al., “QJE November 2006; 1311-1347. Duflo et al Journal of European Economic Association 2007; 5(2-3): 647-661.

7. Why do we see the opposite of what standard economics would predict? • Saver's credit: • benefit integrated with (lost in) large payment (income tax) and hence not salient • reduction in amount one otherwise would have had to pay is very amorphous • Match: • benefit is separated and hence salient • feels as if you are getting a gift (that you will forego if you don't save)

8. Take-away:$≠$≠$

9. Implications for VBID and incentives. . . • Adjusting price alone may not achieve the desired effects (copay reduction/premium adjustment). • Need to think about how we deliver programs: • Are embedded incentives salient? • Is lowering price to zero sufficient (colonoscopy)? • Framing of losses vs rewards • Present bias • Mental Accounting • Consider intersection between getting the prices right (VBID) and use of decision errors to help people make choices that lead to improved long-term health

10. Behavioral Economic concepts that will likely make incentives more effective Loewenstein, Brennan, and Volpp, JAMA, 2007 Volpp, Pauly, Loewenstein, Bangsberg, Health Affairs 2009

11. Employers are increasingly using incentives to drive better health behaviors

12. Poor health habits are the top challenge to maintaining affordable benefits coverage Source: NBGH/Towers Perrin Survey 2009

13. Design elements in Reward Programs are critical • Design flaws: • Rewards once a year ignore myopia • Single high threshold • Targets frequent exercisers 12

14. Direct payments are effective - Long-term smoking cessation rates triple in incentive group • 878 Subjects from 85 General Electric worksites throughout US • 2-arm Randomized controlled trial • Information about smoking cessation programs vs. information plus incentives • $100 for completion of program, $250 for 6 month cessation, $400 for 12 month cessation • Eligibility tied to quitting within first 6 months • Incentives discontinued after 12 months p-value for difference < 0.0001 Volpp, Troxel, Pauly et al, New England Journal of Medicine. 2009; 360(7): 699-709.

15. Quit rates still nearly triple after 18 months Quit rate ratio 2.9 at 12 months (14.7 vs. 5.0%) 2.6 (9.4 vs. 3.6%) at 18 months GE has implemented plan based on this nationwide with 152,000 employees in 2010 p-value for difference < 0.0001 Volpp, Troxel, Pauly et al, New England Journal of Medicine. 2009; 360(7): 699-709. 14

16. Augment incentives using group structure. . . “Dutch lottery study” for HRA completion (Mckinsey client) Control - $25 Direct payment - $50 Dutch Lottery - $25 plus $25 lottery Workforce divided into groups of 4-8. 1 group chosen at random each week - If group number chosen, eligible to win only if you had completed HRA - $100 to each completer - $125 if > 80% of group Uses anticipated regret, social norms Implemented company wide 2010 Source: Haisley E, Volpp KG, Pellathy T, Loewenstein G, 2011. Am J Hlth Prom In Press.

17. Design of Incentives is key to effectiveness Section 2705 may increase adoption Mental accounting is important Provide rewards (or penalties) in as salient a way as possible Focus on rewards in present

18. Questions we don’t know the answer to. . . • Relative effectiveness of carrots and sticks • Optimal duration, design, magnitude • What contexts make most sense (easier success with prevention or smoking than obesity) • How to leverage social influences • Whether this will greatly influence health of beneficiaries going forward or be used primarily to shift costs onto higher risk people

19. Summary • Getting prices right (VBID) is only part of the battle • Need to take into account common decision errors (myopia, inertia, mental accounting, loss vs gain framing) to make interventions more effective) • Economic or behavioral economic interventions more effective in contexts where social forces/environment can be leveraged to achieve sustainability • Important to test and retest as we implement new programs as programs may not be as effective as we expect and iterative process can get us closer to where we want to be

20. Disclosures and acknowledgements The studies described here in which I have participated have been funded by Centers for Disease Control, National Institutes of Health (NHLBI and NIA), United States Department of Agriculture (USDA), Mckinsey, the Aetna Foundation, and the Hewlett Foundation. Dr. Volpp has served as a consultant for Mckinsey, CVS Caremark, and Ascension Health Acknowledgements to my coauthors including in particular: George Loewenstein, PhD; Mark Pauly, PhD; Andrea Troxel, PhD; Jalpa Doshi, PhD; Steve Kimmel, MD MSCE; Jingsan Zhu MBA 19

21. Leonard Davis Institute Center for Health Incentives and Behavioral Economics (LDI CHIBE) • chibe.upenn.edu