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Incentives

If the book Freakonomics could be summed up in one world, it would be 'incentives'. I was reminded of this book recently when I saw the Freakonomics documentary. The mini-stories in the film were all very well produced; but you won't learn anything new from the movie that you hadn't already taken away from the book.

I'll be the first to admit that I'm incredibly receptive to incentives in my everyday life. I'm the person who rushes to get a bunch of food and drink orders in by 7pm to cash-in on happy-hour specials. I'm the person who chooses where I go out to eat depending on which night of the week it is and which restaurants have daily specials. Part of this has to do with my cheap-by-necessity nature, which I've written about in the past, but a lot of it has to do with the fact that incentives work.

(from WarmSleepy on Flickr)

A friend of the blog was recently telling me about the health care plan she receives as a benefit from her employer. The monthly premiums are high, but the co-pays on doctor visits and prescriptions are very low. Thus, as she explained, she might go as often as possible to "get her money's worth".

Personally, when it comes to health insurance, I'd rather pay a lower premium and higher co-pay, since I don't go to see a doctor all that frequently. Unfortunately, there's not always an option. People are lucky to have any employer-provided insurance these days, often times it's a single plan that you either opt-into or you don't. For me, that's exactly the case.

There aren't many people who can look at you with a straight face and say that the American health care system isn't pretty wacky. On the one end of the spectrum are people who desperately need care but aren't seeing a doctor when they need to because they can't afford it. Then on the other side of the spectrum are people who are over-consuming health care because they want the best bang for their buck.

One thing that both of these scenarios have in common is that people respond to incentives.

Comments

Kent said…
This doesn't strike me as an issue about incentives. It looks more like simple preferences: choosing a plan that has high mandatory costs and low discretionary costs versus one with low mandatory costs and high discretionary costs. The "incentives" a person responds to are irrelevant, since before a person can receive medical services, they must choose which structure they can work within. My point being that, it seems wrong to talk about incentives manipulating people's behavior when those people get to choose their own incentive structure.

A better health care example would be the tax exclusion of employer-sponsored insurance premiums (but not actual out-of-pocket medical expenses). Here, a government policy seems to incentivize the high-premium/low-co-pay plans, since part of that high premium cost will be paid for by other taxpayers. And that definitely could mean more unnecessary medical expenditures.

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