How Behavioral Economics Can Help Cure the Health Care Crisis

This post was co-authored with Bret Schroeder and Tom Weakland and is also posted at HBR at

Noncompliance with medical advice is one reason the U.S. health care is so costly. Yet it has received only cursory attention in the national health care debate – undoubtedly because politicians don't want to risk offending their constituents.

How bad is this problem? According to a study by the National Community Pharmacists Association, three of every four Americans don't take their drugs as directed. Forty-nine percent forget to take them; 31% don't fill their prescriptions and 29% stop taking their pills before the drugs run out! According to the New England Healthcare Institute, this costs the U.S. $290 billion per year (over 11% of our $2.5 trillion health care bill).

More waste comes from missed appointments. According to a cross-study analysis, no-show rates for doctor's visits run as high as 20% to 30%. Although there is no system-wide estimate of the effect, one study pegs the overall cost of each missed appointment to be over $700 to the health care system. Given the fact that in 2006 there were about 900 million appointments, the annual cost to the system is over $150 billion.

We think there is a tremendous opportunity to use behavioral economics (which recognizes that people aren't always rational) and relatively simple technology to create new tools that aid health organizations in managing consumers' behavior and that help patients improve their own actions. Even very small changes in patient population behaviors would have a dramatic impact on costs.

For example, our firm worked on a project to help the state of Gauteng, South Africa, create an information infrastructure to help manage diabetes care. Our approach used a combination of education, clinics, web services, and cell-phone reminders to get patients to heed their doctors' advice. Gauteng was able to reduce missed appointments from about 70% to 30% almost immediately.

We are now in the midst of designing a new system that employs a number of behavioral economics concepts (reminders, pre-commitment, social pressure, default options, etc.) to reduce waste even further.

Sure, it would be nice if we all rationally acted in our own best interest and followed the doctor's orders – but we don't. By recognizing that and using insights from behavioral economics to design innovative approaches, we can improve health and drive down costs.

For example, after a stroke doctors usually prescribe a blood thinner to help reduce the chance of recurrence from 24% to 4%. Despite the fact that taking this drug significantly reduces the chance of an additional brain damage, many patients don't take their medicine.

Researchers Kevin Volpp, George Loewenstein et al, conducted a small-scale experiment to see if they could combine three incentive ideas drawn from behavioral economics to change this sad state of affairs. They used (1) small, frequent rewards, (2) a small chance at a big reward, and (3) the regret of missing a payoff.

In one test group, 20 patients were entered into two daily lotteries. All participants had a one in five chance of winning a $10 prize, and a one in 100 chance of winning a $100 prize. (For those of you who remember your probability class, this means they had an expected value each day of $3.) Patients had an electronic pillbox in their homes that recorded whether or not they took their medicine. If they had not taken their pills correctly, they were disqualified from the lotteries. Winners who had not taken their medication were informed that because they had not complied with the drug regimen, they would receive nothing.

Noncompliance dropped from 22% to under 2% for the entire three months of the study. A well-designed $3 payoff was a more powerful motivation than a 20% decrease in the likelihood of an additional stroke!

Clearly, investments in such creative solutions that reflect how people really think could rapidly generate a huge, measurable human and financial return. It is time to make such investments a priority.

Our questions for our readers are:

  • How well do you manage your own health? Why or why not?
  • If you work for a participant in the healthcare system, how focused is your firm on helping change behaviors – not just manage bad outcomes?

Tom Weakland leads the health care and public sector practices of Diamond Management & Technology Consultants. Bret Schroeder is a principal in Diamond's health care practice.

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