Saturday, December 21, 2013

Obamacare: A Behavioral Economic Analysis

One thing that we can all agree on is that Obamacare has not lived up to expectations. Even the most ardent supporters admit as much. The question everyone is asking now is: Can Obamacare recover its popularity?
After all, the ACA didn't use to be as unpopular as it is today - sure, the country has always been divided and most polls showed a plurality/majority opposing it, but opposition was never overwhelming like it is now.
Liberals like to point out that every big government program is controversial in the beginning - Social security, medicare, medicaid and so on. And no-one is seriously trying to repeal any of those programs today; and therefore, despite the rocky start, opposition to Obamacare is bound to die out eventually.
But these programs were quite different from Obamacare. In this article, I am going to give you three behavioral economic reasons why Obamacare will not recover:
1) Yes, there are winners - but they may not realize that they are winners. Imagine someone who today has a health insurance that doesn't cover treatment for breast cancer. Perhaps this someone is a man, and so he doesn't expect to get breast cancer as it predominantly occurs in women. Now, he is forced to get a health insurance that costs him $300 more per month that covers breast cancer and a host of other illnesses. Then, three years from now, he does in fact get breast cancer - it can happen to men too, after all - and then, he will of course instantly transform into a big Obama/Hillary supporter and thank God for the ACA for the rest of his life, right?
Not so fast.
What if, three years from now, he doesn't remember that he wasn't insured against breast cancer before Obamacare came around? He'll sure be happy that he has access to health care, but he may not thank Obama and the Democrats for it - the "link" isn't obvious once this individual has become used to having health insurance (after all, how many of us can remember exactly what our insurances covered and didn't cover several years ago?). With every political reform, there are winners and losers. What puts Obamacare into such a dire position politically is that many of the winners won't realize that they are winners. On the other hand, when social security was introduced, everyone knew whether or not they were a winner or a loser.
2) While everybody will retire eventually, not everybody will ever use an insurance. At least not until they're very old. Basically, the liberal "sales pitch" for Obamacare is "Once you fall seriously ill, you'll be happy you have health insurance" - and that's true of course. The problem is that, as human beings, we are not very good at calculating risks. A typical example of this is a lottery: The chance of winning may be as low as 1/200 000, and the ticket buyer may be aware of this, but the buyer doesn't act according to his knowledge: He knows that the ticket isn't worth the cost (if it were, the lottery wouldn't be profitable after all), he knows that he could play for several lifetimes without winning, but this doesn't stop him from buying the lottery ticket.
Why? Well because of overoptimism bias, of course: We tend to believe that we are the lucky ones. We may know that the likelihood of winning the lottery, or the likelihood of remaining healthy until the day we drop dead (which is the health care equivalent of winning the lottery) is extremely low - but we may still believe that it will happen to us. Nobody knows for certain why this bias exists, whether it has provided some sort of evolutionary advantage at some point, but it is very well documented.
What this means in practice is that even among those who have a relatively high risk of falling ill, Obamacare will far from always be welcomed with open arms: They may think that "I don't need any insurance, I'm healthy, there aint no way I'm getting cancer or whatever" - something that may not be true of course, but an overoptimistic bias can make it seem true to these individuals who are forced to buy health insurance. They benefit from it, but they don't realize it themselves, because they are thinking too highly of their own health and underestimate their chances of falling ill.
This is also one reason why preventive care isn't as cost-saving in practice as it should be in theory - nobody bothers going to the doctor until they're actually sick. Early symptoms are left unnoticed, risk factors are left uncontrolled - in general, people just don't like spending more time in the doctor's office than they actually have to. Overoptimism bias can prevent us from realising that we may be one of the unlucky ones who actually end up dying because of lack of preventive care.
Everybody understands that they will sooner or later retire; which is one reason why social security is so widely accepted - everyone will depend on it sooner or later, so it makes sense paying for it now. The same cannot be said about health insurance. Therefore, when faced with a sudden price hike, a lot of people will choose to pay the penalty even though it would have made economic sense to buy insurance (even under the new, higher price).
3) The cost is direct, not indirect. As we all know, nobody likes paying. We would all prefer if we could just get everything we wanted for free, but most of us accept that it's not possible (a few progressives are an exception from the rule).
I don't know if you knew this, but how much we dislike paying depends a lot on how we pay. For example, most people find it less painful to pay by credit card than to pay by cash, because we're not actually paying at the point of purchase and so it (almost) feels like not paying at all - which is one reason why so many people overspend with their credit cards. Paying with card overall is less painful than paying with cash, and paying less frequently is more painful than paying more frequently (how many bites would you eat at the restaurant if you had to hand over a dollar for each bite, instead of paying for the entire meal right before or after you'd eaten?).
Now, after this brief introduction to the psychology of payment, I'm going to get to the point: Paying for Obamacare is painful! Much more painful than paying taxes in general - since taxes, for most people, are taken directly out of their paychecks, they never see the money and don't feel the pain of losing them.
If Obamacare had been paid through taxation instead and the insurance charge had been automatically deducted from everybody's paychecks, I suspect things would have been running a lot more smoothly: Yes, people would have noticed that their taxes had gone up, but they would not have "tied" this to Obamacare in the same way they are doing now. The amount we have left of our paychecks after taxes shifts every year naturally for a lot of reasons: Federal, state and local income taxes change a little bit from year to year, plus salaries can change as we get pay raises, promotions, change jobs etc. The increase in taxes (and reduction in after-tax income) would, in this scenario, not have been blamed entirely on Obamacare.
But the way things are, with the exchanges, everyone can see exactly how much the Obamacare-approved insurance plans cost, and they are able to compare the new insurance with the old, in a way they wouldn't be able to if the cost was just bundled together with the income tax (as is the case in countries with universal health care). Your tax bill would be higher for some reason and you'd no longer have to pay insurance bills, and very few people would sit down and do the math on whether they had lost or gained from the change.

In conclusion...
I know that leftists will claim that all these reasons why Obamacare will fail comes down to the fact that people are irrational - "we just have to get people to be rational about this and everything will be fine", they will say. But here's the thing: The point with leftist politics, according to the leftists themselves, is that it can withstand irrationality in a way conservative policies simply can't. The reason why free markets fail according to the left is because consumers and investors are irrational - irrationality is the reason why markets have to be regulated. In this case however, it seems obvious that the government itself forgot about consumer psychology and built a program based on neoclassical rationaliy assumptions. The irony could not be greater.
What the left refuses to understand is this: Humans are irrational, but we are irrational because we are humans. We are not irrational because we have free markets and trade; we are irrational because that's the way we are born. If you take an irrational man and you elect him President, he is not suddenly going to stop acting irrationally. Instead, he will continue to act irrationally, and he'll be able to cause so much more damage now that he has presidential powers.
A final remark: I'm not saying that Obamacare would be successful were it not for psychology, but that's a discussion for another post.
Thanks for reading.
Photo credit: Shan213 via Flickr (attribution 2.0 generic)

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1 comment:

Anonymous said...

I can't read this. The print is not bright enough. Does anyone else have the same problem or is it my phone?