American presidents have been trying to reform our healthcare system since at least the Nixon era, but with only limited success. Past reform efforts have failed for many reasons. For starters, the U.S. healthcare system is complex, with the medical industry making up almost 1/6 of our economy. But perhaps the biggest obstacle to reform is a psychological one: thoughts of health-care reform too often trigger images of putting for bogey instead of putting for par.
I am referring to the psychological power of loss aversion, a phenomenon that behavioral economists have been studying for several decades now. Most of us, you see, seek to avoid losses with greater fervor than we seek to achieve equal gains. If given a 50-50 chance of either winning or losing $100, we decline. The $100 loss looms larger than the $100 game. For similar reasons, most people express greater interest in surgical procedures that carry 90% survival rates than in ones that carry 10% mortality rates, even though these procedures are identical. Thinking about mortality triggers loss aversion. This week we even learned that loss aversion influences putting behavior among professional golfers. When putting to avoid a bogey, golfers are more aggressive than when putting for birdie, and consequently are more likely to make their putts. Few things are more motivating than the desire to avoid losses.
Which brings us back to healthcare reform. When President Clinton attempted an overhaul of our healthcare system in the 90's, his administration correctly recognized the need to control health care costs. Without cost containment, they knew it would be impossible to expand health care insurance to the millions of people who lacked such coverage. So the Clinton administration looked for ways to increase the number of Americans enrolled in managed care plans, which at that time had achieved some success in controlling healthcare expenditures.
The problem with the Clinton approach was that it made Americans feel like they were losing their traditional healthcare. Managed care was infamous for saying no -- for denying people healthcare services and for limiting their choice of doctors. By taking things away from people, managed care triggered loss aversion. Consequently, the American public never supported Clinton's reform efforts.
The Obama administration is steeped with people knowledgeable about behavioral economics, who hope to keep the public from slipping into a state of loss aversion. Not surprisingly, then, the administration has enthusiastically embraced research out of Dartmouth University, demonstrating huge regional variations in medical expenditures that have not been accompanied by any variation in healthcare quality. According to this research, some cities in the US spend twice as much per capita on health care as other cities without experiencing any discernible improvement in health.
Obama's people hope that Americans will perceive healthcare reform as a win-win opportunity, with lower health care costs through the elimination of waste and inefficiency, accompanied by more stable and secure healthcare coverage. But even if the administration succeeds in assuaging the fears of the general public, they face a much stiffer challenge with the health care industry. Any success they have in controlling health care costs will, after all, create losers. If we spend less money on healthcare in the US, then someone in the healthcare industry is going to take a financial hit. One person's waste is another person's income.
No surprise, then, that both the insurance industry and the AMA have begun pushing back against elements of the Obama plan. These groups stand to lose money under healthcare reform. Hospitals are likely to lose money too, as are drug companies, medical device companies, and other powerful parts of our vast healthcare industry. All of these groups will be motivated to fight health care reform.
The Obama administration has made a point of distinguishing its behavioral approach to economics from the more traditional approach embraced by the Bush administration. Ironically, though, it is the Bush administration that understood how to pass healthcare reform without triggering loss aversion. When George W. Bush decided to push for a Medicare drug plan, he recognized that the pharmaceutical industry would wield its powerful lobbying strength against his efforts if they feared a loss of income. So he crafted a plan that benefited the drug industry. Politicians on the left criticized these concessions to industry, but it is hard to imagine the drug plan passing without such concessions.
Obama should draw a lesson from his predecessor. If he causes the healthcare industry to perceive his health plan as a threat to their incomes, his plan will face stiff resistance. For healthcare reform to succeed, people in the healthcare industry need to keep making exorbitant sums of money for awhile. Over time, the government can gradually ratchet down health care costs. But initially, Obama needs to reduce the number of people who perceive healthcare reform as a loss.
The cost will be steep. But the alternative will be more costly. We cannot afford to make reform feel like a healthcare bogey.
Peter Ubel is author of Free Market Madness: Why Human Nature Is at Odds with Economics -- and Why It Matters (Harvard Business Press, 2009), and Director of the Center for Behavioral and Decision Sciences in Medicine at the University of Michigan.