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Why the Savings From Health Care Reform Are Underappreciated

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The lack of a whole-hearted, landslide, public embrace of health reform is surprising considering that unless your family earns over $250,000, reform costs you nothing and, the President's health care plan, if enacted, is estimated to increase the income of the average family of four by about $10,000 in 2030.

One part of the explanation for public reluctance to embrace reform may be explained by behavioral economics. Behavioral economists have found that people in most situations:

  • Undervalue future money and overvalue money now,
  • Focus on losses over gains, and
  • Prefer the status quo over change.

How does this play out in health care? Let's consider each of these behavioral factors in turn.

The first, undervaluation of the future, is called hyperbolic discounting. A classic example of hyperbolic discounting is credit card debt. A shopping spree generates benefits today for costs that occur in the future; because the costs occur in the future, shoppers tend to undervalue them. Accordingly, people tend to prefer actions that produce benefits today with future costs over those that produce costs today with future benefits. Hyperbolic discounting also offers an explanation for low rates of savings and investment in the United States. Savings and investing both involve costs today but benefits are not realized until far off in the future. Healthcare reform is like investing; it requires up front costs for future benefits.

Reform benefits families by increasing income. It also, among other benefits, saves families money by lowering premiums, copayments, and out of pocket expenses. Some estimates project families will save $3,759 in premiums in 2020 compared to what they would pay without reform. Despite these real financial savings, people may undervalue the benefits because they will occur in the future.

Just as future benefits of change are discounted, so too are the costs of continuing the current health care system. Studies show that without reform a family of four can expect to pay almost $24,000 in premiums by 2020 . Other costs of the current system include benefit reductions, denial of care, and less coverage - these additional costs may not have a price tag on them but they are just as real as the benefits of reform. Yet, research suggests that the public may undervalue these costs because they are still to come.

Then there's loss aversion, which helps explain why people feel anxious about reform despite its benefits. Studies indicate that people experience greater unhappiness from paying out a $1 than they do pleasure from receiving a $1. In short, people don't get as excited about gains as they get worried about losses. So even though healthcare reform doesn't cost most taxpayers anything and is revenue-neutral which means it doesn't affect the federal budget, the fact that it does cost something generates anxiety. Think about the example of the $1. A person that spends a dollar in the morning but gets a dollar back at dinner will be less happy than a person that doesn't spend or get anything at all - even though at the end of the day they both have the same amount of money. Loss aversion tells us that contrary to logic, a dollar in is not the same as a dollar out. Even people who aren't satisfied with the current healthcare system will feel anxious about change and can be very susceptible to arguments that they may lose something they value.

Finally, change is hard. Behavioral economics explains aversions to change through the endowment effect, or the preference for things simply because they belong to you. The following classic experiment illustrates how the endowment effect works. In it, some students in a class were given coffee mugs and asked to name a selling price. Others in the class were asked how much they would pay to buy the mugs. Rational people should value identical mugs equally. Researchers found that was not the case. Instead of valuing the mugs equally, people with the mugs demanded more than twice as much as the people without the mugs. Simply possessing the mugs increased their value.

When it comes to health care reform, many people may want to keep the current system because it's what they have now -- and they value it.

The American people have two choices. Implement healthcare reform now, when the future benefits outweigh the current costs -- even though it may feel like the costs are higher than the benefits. Or wait as rising healthcare costs slowly drain our bank accounts. Either way, the need for reform is real. Let's get rational and do it.