Behavioral Economics in D.C.: We Don't Have to Wait for Obama

It turns out C.B.O. director Peter Orszag is a believer:

The talk emphasizes my belief that effective policy design, including policies affecting health care, must reflect more of the insights from behavioral economics -- that is, we need a bit more "Psych 101¿ in addition to "Econ 101" in the design of public policies.

Here is the talk. The takeaway is that although there's been much discussion about how the coming retirement boom will send health care spending through the roof, the actual effect of aging on Medicare and Medicaid represents at most 50 percent of the rise in costs going forward:

The big driver of future spending will be the increased cost for treating each beneficiary rather than the increased number of beneficiaries. And a lot of health care spending has been shown to have no correlation with actual health outcomes in the U.S. That means there are a lot of inefficiencies to weed out.

Healthcare spending currently makes up 16% percent of the economy and Orszag estimates that 30% of that, or $700 billion, can't be shown to improve health. That's where behavioral economics comes in.

One of the more popular insights from behavioral research is that the design of the "default" option for people who don't choose a particular type of plan is quite important. A famous study showed that employee enrollment in a company's 401(k) plan increased dramatically after the default option was changed from no enrollment to immediate enrollment. Similarly,

the Medicare drug benefit has enrolled individuals eligible for its low-income subsidies into one of the lower-cost drug plans that charge no premium to them; although they have the option of switching to another plan, many of those enrollees have not done so.

Incorporating insights from behavioral economics isn't going to completely solve the health care mess headed our way, but it could go a long way in reducing some of the pain.