Clinical Nuance: Benefit Design Meets Behavioral Economics

Kavita Patel, Elizabeth Cliff, and Mark Fendrick in Health Affairs: “In Capitol Hill, there’s a growing chorus of support from both sides of the aisle to move the focus of health care payment incentives from volume to value. Earlier this month, legislators introduced proposals that would have fixed the sustainable growth rate in Medicare, as well as made other changes, including allowing for clinical nuance in Medicare benefit designs. The Centers for Medicare and Medicaid Services, too, is embracing this trend, recently asking for partners in a demonstration project to used value-based arrangements in benefit design. These efforts of policymakers and agencies to innovate Medicare’s benefit design are crucial both for the health of seniors and to ensure value in the Medicare program.
The concept of clinical nuance, implemented using value-based insurance design (V-BID), is a key innovation already widely implemented in the private and public payers. It recognizes two important facts about the provision of medical care:  1) medical services differ in the amount of health produced, and 2) the clinical benefit derived from a medical service depends on who is using it, who is delivering the service, and where it is being delivered.
Today’s Medicare beneficiaries face little clinical nuance in their benefit structure. Medicare largely uses a “one-size-fits-all” structure that does not recognize that some treatments, drugs or tests are more important to health than others. Not only does it create inefficiencies in the health system, it can actually harm the health of beneficiaries.
Some discussion of economics explains why. The concept of moral hazard, which posits that individuals over-consume when they are not on the hook for the cost of their behavior, is well established in health care. It is used to explain why those who are insured use more care than they might need to remain optimally healthy.  But, that’s only half the story. There are lots of beneficial medications or services that we wish people would use—and for some treatment adherence is low. So what gives?
Recently, three economists — Katherine Baicker, Sendhil Mullainathan and Joshua Schwartzstein — coined the term “behavioral hazard.” They use it to refer to suboptimal choices that people make based on their own behavioral biases. For example, a diabetic patient might feel fine and choose to forgo regular eye exams, only to have their disease progress. Here, higher levels of cost sharing worsen the problem. A beneficiary who faces both financial and behavioral obstacles to treatment adherence is less likely to behave in a way that ensures optimal health.
That brings us back to the concept of clinical nuance. Clinically nuanced insurance designs recognize both moral and behavioral hazard, and seek to shape incentives to minimize their impact. When patients’ incentives are aligned with evidence-based medicine, it improves outcomes, helps patients and, in some clinical situations, lowers costs.”