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Behavioral Economics in the Health Care Industry

By: Sai Srihaas Potu

Almost everyone knows that this country has a scandalously large number of people who lack health insurance, now up to 46 million and growing. That number is vivid and evocative. But it has overshadowed another, more serious issue—that of the steady escalation of health care costs. Largely due to the use of medical technology, those costs are now increasing at an annual rate of 7% a year.

United States health expenditures continue to escalate and are expected to exceed $4 trillion by 2020. One suggestion for improvement centers largely on increasing price transparency in health care, with legislative actions taking place at both the state and federal level. These efforts are in hopes of improving health-care value, or the benefits attained for a given amount of health expenditures, by reducing unnecessary spending through changes in physician behavior.

In a recent study, researchers argued for the proliferation of computerized physician order entry (CPOE) systems. This technique creates new possibilities for putting pricing information in the hands of providers at the time they make a decision. Typically, many CPOE systems use a process in which the name of the test or therapy is entered manually. This is analogous to an opt-in system when it comes to choosing lower-priced treatment alternatives.

Libertarian paternalism is an approach to public policy that applies principles of behavioral economics to help individuals achieve their goals. Interventions that apply these efforts have been described as nudges, for they can help people who are making suboptimal decisions behave more optimally without affecting those who are already behaving optimally.

Influencing physicians to consider the value of diagnostic or treatment alternatives could be done more effectively than by simply displaying the prices of each test or treatment in isolation. First, prices should be framed in ways that are easily comprehensible and where reasonable alternatives are highlighted. Instead of simply displaying the price of an intervention, the price could be graphically depicted as a multiple of the price of another less expensive, yet equally effective intervention.

Second, information about the relative price of interventions could be enhanced by providing relative information on more than just price. Simply providing information about the price of a particular diagnostic test in isolation or stating that it is less expensive than another diagnostic test doesn’t help physicians to understand which one is the best to order, especially if the sensitivity and specificity of the tests vary widely.

The US Preventable Services Task Force has created a grading system that helps physicians to better understand when it is recommended to conduct screening tests. Displaying similar grading systems and providing both the relative prices and ratings of different tests could help physicians to rapidly interpret this information at the time they are making ordering decisions.

Third, using an enhanced active choice to make physicians choose between higher and lower-cost alternatives will likely lead to more physicians choosing the lower-cost alternatives. In isolation, it is easy to order a more expensive test of similar effectiveness. However, these decisions can be structured in a way that makes the cost and quality tradeoffs more visible.

Finally, while enhanced active choice would likely be quite effective in improving the weighing of costs and benefits in physician decision making, in cases in which there is a dominant alternative from a value standpoint, consideration should be given to moving beyond the active choice to modifying electronic order entry sets such that the higher value options are set as defaults where an opt-out is possible.

This will achieve the greatest likelihood of the highest value alternatives being chosen. In situations in which it is not clear what is the highest value alternative, enhanced active choice is likely the best alternative. It is also important to have a mechanism for easily opting out so that if there are special circumstances for a given patient, an alternative can easily be chosen.

Providing price information at the point of ordering services is unlikely in isolation to transform physician decision making to consistently weigh the value of health-care services. Provision of relative information on the price of alternatives as well as the context that helps physicians to understand an intervention’s value will be important.

The proliferation of electronic order entry systems creates an opportunity nationally to use active choice and systematic modification of defaults in computer order entry templates to have a large impact on provider decision making. Leveraging insights from other public policy initiatives around the relative effectiveness of information provision vs. defaults can help us more quickly get to a point where physicians choose higher-value treatments at higher rates.

The application of behavioral economics to healthcare is indicative of an exciting movement to bring new science and technology to some of society’s most serious and persistent problems. The field of behavioral economics has made important inroads into the understanding of healthcare decision making through the concept of libertarian paternalism.

Furthermore, behavioral economics provides a suite of methods and tools to examine the healthcare industry in systematic, precise, and novel ways. The opportunities ahead in exploring the space made available by this approach abound and continue to have great potential in improving our understanding of healthcare policies.


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2. Patel MS, Volpp KG. Leveraging insights from behavioral economics to increase the value of health-care service provision. Journal of General Internal Medicine. 2012.

3. Sinaiko AD, Rosenthal MB. Increased price transparency in health care—Challenges and potential effects. New England Journal of Medicine. 2011.

4. Tierney WM, Miller ME, McDonald CJ. The effect of test ordering of informing physicians of the charges for outpatient diagnostic tests. New England Journal of Medicine. 1990.

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