What the Placebo Effect Can Teach Us About Health Care Reform: An Interview With Peter Orszag

Last week I started an exchange of questions and answers with Peter Orszag, the director of the Office of Management and Budget, on the issue of health care. Our first Q&A is here. Our second is here.

Q. As a fan and student of behavioral economics, what’s the most exciting, or perhaps the coolest, thing you’ve learned about the quirky way people interact with the health care system? And how’s that running program going?

A. I’ve become more and more persuaded that the lessons I was taught in “Econ 101” are insufficient to analyze public policy. Study after study has shown that we are not the hyper-rational calculating machines that economic theory assumes—and that we ignore at our own peril the crucial role of expectations, beliefs, and social norms in influencing behavior.

This is just as true in medical science and health policy as in other fields. The placebo effect is a compelling example here: Medicine tends to dismiss it as a statistical annoyance rather than examine it in and of itself, even though placebos are often more potent empirically than actual medical intervention. (One of the more fascinating studies I’ve come across in this vein was done by two Harvard psychologists who studied hotel cleaning staff and the effect of “perceived” exercise. At the outset, they found that most hotel workers didn’t believe their work was exercise—two-thirds reported that they didn’t exercise regularly, and more than one-third reported not exercising at all. But when the researchers informed a group of these workers that their eight-hour-a-day activity of cleaning rooms counted as “exercise,” the effects were similar to an increase in actual exercise. The workers lost weight and lowered their blood pressure, apparently just by thinking that the same activity they were already doing was exercise! That’s just one example that shows the power of human psychology.)

More broadly, behavioral economists have emphasized that people’s choices are highly sensitive to factors ignored by rational, “Econ 101” models—things like simplicity and inertia, which can sometimes be far more important determinants of choice than monetary incentives. For example, behavioral economists have demonstrated the impact from making enrollment automatic in retirement plans—participation has been shown nearly to double after introducing automatic enrollment, and nearly to triple among lower-income workers, despite the fact that workers could opt out at any time. Defaults matter in health plans, too: Most people don’t switch their health plans during “open enrollment season,” even if doing so would be beneficial to them. The point is that health reform will fall short if it doesn’t reflect how people actually go about making decisions in their day-to-day lives.

Finally, on my running: My past strategy of making an automatic contribution to a charity I did not support if I failed to reach a goal has proven to be controversial among runners. So I should point out that I simultaneously used a positive incentive (and, with my children’s help, raised more for some of the charities we support than I ever thought possible) in addition to that “negative” incentive. Unfortunately, while I am still running (often very early in the morning or very late at night), training for a marathon is not in the cards while I’m in this job.

Q. There is a concern in some quarters that in order to meet budget targets, the health care bill will be so whittled down it will end up making half of the reforms badly or at best a kind of watery improvement. I realize you’re getting it from both sides—it costs too much! it doesn’t do enough!—but from a health savings perspective, are there elements that contribute to cost savings that just can’t be whittled down further without losing their effectiveness?

A. I think you are implicitly pointing to a valid concern—that the process of health care policymaking can become overly politicized. That’s why the administration has put high on its list of priorities changing that dynamic by taking some of these decisions out of the hands of politicians and putting them in the hands of doctors and other medical professionals. For example, one approach we’re open to involves giving more authority to a body like the Medicare Payment Advisory Commission, a Medicare advisory commission established by a Republican Congress. Currently, MedPAC—a nonpartisan, highly technical body—issues pages of recommendations each year to make Medicare less costly and more efficient, but these reports tend to be read just by wonks like me and then gather dust on bookshelves without being enacted or really even considered. The administration is currently working hard with Congress to devise a way of giving these recommendations teeth—so that they aren’t just collecting dust but are actually helping the Medicare system to offer higher quality for less.

This kind of reform is imperative for two reasons. First, it would help to insulate Medicare decisions from undue political influence. Second, it would help us keep up with the ever-evolving health care market and continually reorient it toward better and more efficient care. Moving more decisions into the hands of medical professionals and out of the political process will enable us to continually update the system to reflect new information and changed circumstances—and will make sure that health reform is not just a one-shot deal but an ongoing effort to deliver Americans higher-quality, lower-cost health care.

Q: The president said this in his ABC town hall:

The Congressional Budget Office, the CBO, which sort of polices what all various programs cost, they’re not willing to credit us with those savings. They say, “That may be nice, that may save a lot of money, but we can’t be certain.” So we expect that not only are we going to pay for health care reform in a deficit-neutral way, but that it’s also going to achieve big savings across the system—including in the private sector where the Congressional Budget Office never gives us any credit—but if hospitals and doctors are starting to operate in a smarter way, that’s going to help you even if you’re not involved in a government system.

As a former director of CBO, what do you make of your new boss’s comments? Is CBO and effective and accurate arbiter of current and future health care costs?

A:  I couldn’t have more respect for the professionalism and analytical rigor that the staff at CBO brings to their work, and I am proud to have served as CBO director. But it’s also important to bear in mind that CBO’s methods and domain are limited in two ways—and for good reason in both cases.

First, in its cost estimates, CBO is meant to measure the effects of legislation on the federal government’s fiscal position, and so these estimates only capture budgetary costs—not broader costs and savings in the U.S. economy as a whole. The administration has made clear health care reform must not add one dollar to the federal budget deficit—both over 10 years and in the 10th year—using hard savings as scored by CBO. That is CBO’s purview: to evaluate the impact of policy changes on the federal budget over the next decade. We have insisted that health reform be deficit neutral within those parameters. Largely, if not entirely, outside CBO’s purview is the impact of changes on the health system as a whole (as opposed to the federal budget). And thus while we expect that health care reform over time can achieve substantial savings throughout the system, we don’t expect those savings to show up in CBO cost estimates for the next decade—nor should they.

Second, CBO is rightly hesitant to score steps where quantification is particularly difficult (since scoring requires precise estimates), but that does not mean these steps are unimportant. Indeed, some of the most fundamental and important steps may well be the hardest to quantify. We have put on the table nearly all of the structural, game-changing reforms that the Institute of Medicine and CBO itself have suggested may help to bend the health care cost curve, but CBO is understandably reluctant to quantify its budgetary impacts precisely because no one has previously tried to transform the health system in this way. (Even so, as CBO noted in a report released last Thursday, “Many experts believe that a substantial share of spending on health care contributes little, if anything, to the overall health of the nation, so changes in government policy have the potential to yield large reductions in federal spending without harming health. However, translating that potential into reality would require tough choices. It would ultimately depend on policymakers’ willingness to put ongoing pressure on the health sector to achieve efficiencies in the delivery of health care.” That is exactly what the administration is trying to achieve through the game-changers.)

The president’s comments were thus not an “attack” on CBO, as some in the media have suggested, but rather an accurate depiction of what CBO does and does not do.

Q. What’s the most intellectually honest argument against your plan?

A.I have long argued that we need to address rising health care costs, both because they are the key to our nation’s fiscal future and because they are eating away at Americans’ pocketbooks. I often get the following question in response, especially from fiscal hawks: “Why not address costs now and leave the issue of coverage for another day—perhaps after we have costs under control?” It’s a good and tough question, but one to which I think there is an extremely compelling answer.

First, I think it’s important for those of us wearing the green eyeshades to take them off every once in a while and recognize that policy is about more than dollars and cents. I believe that there is a moral imperative for this country to expand health insurance coverage and reduce the ranks of the uninsured and underinsured. If you lose your job, switch jobs, go off to start a business, move, or get sick, you should not lose your health insurance. I see that as a matter of right and wrong.

Second, and putting back on my green eyeshades, the uninsured currently shift costs onto the insured population, and the difficulties of obtaining insurance outside work creates “job lock” by discouraging people from seeking new jobs even if their current one is a bad match. By reducing the ranks of the uninsured, we will reduce the burden on the insured, and by creating health insurance exchanges, we will reduce job lock. Furthermore, it’s hard to imagine that shuttling in and out of insured status, as happens in the current system, doesn’t contribute to lower quality and higher costs, as people see their medical care interrupted and preventative care delayed.

Finally, it’s essential that we address the federal government’s long-term fiscal shortfall, which, as I’ve often said, is largely driven by rising health care costs. It won’t be easy to enact the scoreable offsets and the game-changers that could bend the health care cost curve—but by combining those changes with an expansion in coverage, the overall package will have a broader array of supporters. In other words, it’s likely that the fiscal hawk’s question assumes a political economy that doesn’t exist in the real world and that we wouldn’t be able to pass a cost-reducing reform package at all but for the effort to expand coverage. The bottom line is that if we expand coverage in a fiscally responsible way (by being deficit neutral over the next decade and in the 10th year using CBO scoring), and also enact an aggressive set of game-changers, we would have obtained a good deal from the perspective of this fiscal hawk.