How behavioral economics can help health systems change

Health systems should use behavioral economic principles as they transform to offer value-based products to employers

As health systems are considering ways to grow their contracting relationships with employers — recognizing an opportunity for market growth and increased margins — behavioral economics can help health systems design programs that will add value to employers as they transition to value-based care.

Substantial administrative barriers keep employers from direct contracting. Many employers have geographically diverse populations, and often lack a single delivery system that can meet the needs of a substantial portion of their members. Employers are accustomed to dealing with carriers and carve-out vendors, but are hesitant to add a new category of contractor. Therefore, health systems must provide a compelling value proposition to gain the attention of employers.

Behavioral economics recognizes that human beings are not purely rational decision makers. We use mental shortcuts that are hard-wired in the primitive portion of our brains. Understanding human decision-making can help health care systems design programs and manage change to grow their value-based offerings for employers.

Many behavioral economics buzzwords have gained currency in recent years. We know that humans are loss averse, we over-discount future returns, and we are more reliably persuaded by stories with narrative content than by dry statistics. We are deeply social, and like to emulate others. Most of all, we have limited bandwidth, so we tend to follow the easy path, with the fewest steps and complications. Health systems should consider these behavioral economic precepts as they seek to design systems and products for the employer market. An effective approach takes into account several considerations.

1. Make it simple for employers to use your services. Employers have small human resources teams, and procurement departments generally focus on each firm’s core business and provide contracting for human resources on the side. To improve employer reception, a health system’s products should be offered as part of a carrier’s plan. Health care delivery systems which own health plans are well positioned to incorporate accountable care products from their system in their portfolio of offerings. Some large employers with concentrated populations will do direct contracts, but most provider systems will want their services available within a health plan product to gain sufficient scale.

2. Demonstrate early savings recognizing that we all have “present bias.” Employers will value savings this year far more than savings in the future, so product designers should assume potential clients will steeply discount or even disregard savings projected in two to three years. Instead, show that employers will see savings in the first year or redesign your program to make savings within this timeframe possible.

3. Use “lose aversion” to position the health system product as a way to avoid losing what employers currently have, as opposed to a way of gaining something new. Even a new entrant in the market can frame its offering as maintaining some popular element of existing care, as opposed to losing the delivery system already in place.

4. Tell compelling stories. Stories should be consistent with evidence and based on facts — some purchasers will demand underlying data too — but a good narrative showing the benefit for real patients will gain much more market traction.

5. Leverage the social network effect by showing target employers that others are using your services. For example, start by offering your product to your employees and families. Demonstrating success and satisfaction with your own human capital helps prospective clients feel confident in contracting for your services.

Behavioral economics can also help health systems design their approach to change management within the organization. For instance, loss aversion means no one likes loss — and more standardization leads to a loss of autonomy for physicians. Health systems undergoing transformation to value-based care need to create a grim counterfactual. The alternative to change should not be expressed as a continuation of the status quo, but instead layoffs or worse bankruptcy if competing providers transform and their organization doesn’t change. Furthermore, announcing a future loss far in advance plays on our present bias and can reduce the sting of change.

Compelling stories of other organizations which have been successful can help “sell” the new value-based care organization and its structures. Furthermore, early presentations to influencers can drive earlier acceptance of change. Finally, humans have a strong sense of the importance of fairness and will even act against their personal interests if they feel their organization is being unfair. Provider organizations should evaluate the impact of changes on all stakeholders, and be sure that expectations feel fair.

Developing new products for employers not accustomed to purchasing services directly from providers presents major challenges, and driving change in provider organizations is never easy. The lessons of behavioral economics can help your organization drive success in the evolving value-oriented health care purchasing market.

Jessica Jones
+1 312 873 5126

Jeff Levin-Scherz
+1 617 826 9402

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