Human Organs, Behavioral Economics, and Insurance Mandates

Like the minimum wage and rent control, the market for human organs is a classic topic when teaching the basics of supply and demand. Organ markets are largely outlawed and, as a result, the demand for organs greatly outstrips the supply. For example, according to some estimates, as many as 4,000 people in the United States die each year while waiting for donor kidneys (some of which could, in principle, come from healthy donors).

As Dick Thaler notes in the New York Times today, the usual economist solution to this problem – allowing the buying and selling of human organs – is a political non-starter. Many people find the idea “repugnant,” as economist Alvin Roth has put it.

One solution, which Roth helped pioneer, is to create organ swaps rather than sales. Suppose, for example, that my wife needs a kidney and that I am willing to donate, but am not a match. And at the same time, a woman wants to donate a kidney to her sick brother, but also isn’t a match. That seems like a dead end (so to speak), but if I am a match for her brother, and she is a match for my wife, then we can arrange a swap – my kidney for hers. Two lives get saved, and there’s nothing repugnant about it.

Over time, this basic idea has expanded to include “daisy chains” of donations involving numerous donors and recipients (for a nice description see this recent article in Wall Street Journal).

Thaler considers another way to address the problem of organ supply (from individuals who become brain dead, not those who are healthy)  using the insights of behavioral economics:

One strategy is to alter the default rules for signup. Most states, as well as many other countries, use an “opt in” or “explicit consent” rule, meaning that people must take a concrete action, like going to a public library or requesting and mailing in a form, to declare they want to be donors. But many who are willing to donate organs never get around to such steps.

An alternative approach, used in several European countries, is an “opt out” rule, often called “presumed consent,” in which citizens are presumed to be consenting donors unless they act to register their unwillingness.

“Opt-out” can lead to much higher rate of organ donations than “opt-in”:

Consider the difference in consent rates between two similar countries, Austria and Germany. In Germany, which uses an opt-in system, only 12 percent give their consent; in Austria, which uses opt-out, nearly everyone (99 percent) does.

Of course, the idea of presumed consent is not without controversy. For many people, it seems disturbingly presumptuous for the government to assert some sort of property right to their organs.

In response to that concern, Thaler recommends the middle road of “mandated choice” in which individuals would periodically be required to decide whether or not they want to be donors. In Maryland, where I live, that happens when you go to renew your drivers license.

With mandated choice, the government needn’t presume anything about your willingness to donate. By forcing you to declare a choice, however, it reduces the problem of aspiring good samaritans who never get around to signing up.

 All of which leads me to the following question: can behavioral economics help policymakers think about the idea of insurance mandates and expanding health insurance coverage? My two recent posts about an individual mandate (here and here) have inspired a host of very thoughtful comments, many of which raise concerns (both moral and constitutional) about the idea of the federal government forcing Americans to buy insurance that they may not want.

My question (for which I don’t have an answer) is whether there is some way to adopt “opt-out” policy designs to increase insurance coverage without (overly) violating reasonable beliefs about the appropriate limits of government power. Suppose, for example, that there was some way to default uninsured individuals into relatively inexpensive insurance plans providing catastrophic coverage. The individuals would be allowed to drop out, but at least they would be initially enrolled. Would that be both effective and acceptable? (One concern would be the need for individuals to reveal their insured / uninsured status to the government, e.g., on their tax forms, which I know some of my readers would find troubling.)

Comments welcome.

6 thoughts on “Human Organs, Behavioral Economics, and Insurance Mandates”

  1. “The individuals would be allowed to drop out, but at least they would be initially enrolled. Would that be both effective and acceptable?”

    No.

    Under your proposal, a rational economic actor with a risk-adjusted cost of healthcare lower than the price of the policy being opted out of should opt out.

    This will have the effect of raising the per-capita costs to insure those remaining in the risk pool. Which will increase the price of the policy. Which will result in more rational actors removing themselves from the risk pool.

    If we assume rational economic actors and a non-uniform risk distribution, it is trivial to prove by induction that your proposal will result in no one having any medical insurance at all.

    1. No offense but that sounds like the alleged physics proof that bumblebees can’t fly :). Three things to consider:

      (1) people are risk-averse and thus are willing to pay more for health insurance than its expected value in dollar terms;

      (2) as the behaviorists point out, people exhibit inertia and thus even risk-neutral folks would stay in a plan unless the negative expected value reached some non-zero level;

      (3) your argument applies to health insurance generally, not the specific idea of opt-out coverage. Yet empirically we know that health insurance exists, even in the individual market.

      Re: (3) it is important to note that group coverage is generally subsidized – e.g., through the tax code today and through the tax code and, possibly, exchange subsidies under the proposals being discussed in Congress. Is it your view that health insurance would cease to exist without those subsidies? That’s certainly an extreme version of adverse selection. But let’s put that to the side here and presume that any opt-out coverage would be subject to the same tax/spending subsidies as any other coverage.

  2. Well, if we’re talking about the empirical world where bumblebees fly, where behavior is non-rational, and where adverse selection is a legitimate policy concern, then that’s a different conversation.

    In which case, my question would be, what would you see as the public policy advantages of opt-out vs. straight single payer?

    And do you see these advantages as applicable to the automotive liability insurance market as well?

  3. A lot of people are indifferent with regards to organ donation, because it occurs after you die and most people don’t care at that point. I don’t think this is the case with health insurance where people have a strong sense of whether they want it or not.

    I think this is already the case with some employers. If I remember correctly, a former employer of mine would automatically assume enrollment in a “default” health insurance plan (in addition to other life, disability, dentail and vision benefits), and you could either opt out completely or opt for another (usually more expensive) plan.

    Interestingly enough, many of the other young people I worked with actually opted out of the plan. These were educated and well-paid professionals that decided that even catastrophic insurance coverage just wasn’t worth the cost. This segment of the uninsured population doesn’t want health insurance now and will, presumably, opt out as well in the future.

    Additionally, this doesn’t affect people who are uninsured due to pre-existing conditions. Presumably an auto-in / opt-out policy would result in the same as banning the exclusion of pre-existing conditions.

  4. Donald,

    If health insurance companies are forbidden to refuse to pick up already-sick uninsured folks, if health insurance companies can’t exclude benefits for pre-existing conditions, if folks can pick up health insurance without penalty after something happens to their health, even with a system where folks opt out rather than opt in, lots of folks are going to take the money and run.

    Geoffrey’s experience is instructive.

    “Interestingly enough, many of the other young people I worked with actually opted out of the plan. These were educated and well-paid professionals that decided that even catastrophic insurance coverage just wasn’t worth the cost.”

    It’s reasonable to think that these folks didn’t opt out IN SPITE of their being educated and well-paid, but BECAUSE of it, as these folks are likely bright enough to understand that there’s little downside to keeping the premium dollars now and expending them when needed later.

    You mention that folks are risk-averse. But right now, the risk is that one might live in a state, or may need to move to a state where insurance might be unavailable to already-sick folks, or where insurance may not cover pre-existing conditions for folks who were previously uninsured.

    Once these two risk factors are eliminated (and the proposals I’ve seen from the White House and from the Democrats in Congress all eliminate them), there really aren’t any risks to going uncovered until one needs coverage.

    Perhaps an alternative might be an opt-out where, when one opts out of even minimal catastrophic coverage, one explicitly renounces free health care if one suffers a health catastrophe. If you’re in an accident or discover that you have a life-threatening illness, and the available credit on your VISA or MasterCard doesn’t cover the expected cost of treatment, well, then you’re out of luck. Go get a bank loan or something. Can’t score a loan? Go home and die.

    Sounds harsh, I know. But already, a lot of folks who can afford coverage forgo it, and if we eliminate all risk associated with that course of action, without also requiring folks to have coverage, I don’t know why we’d expect the number of folks who go without coverage to decrease over the long term.

    The fundamental reasons why we buy health insurance are because we fear being wiped out financially if we have a serious health issue, or worse, fear being denied health care if we have no insurance and can’t afford the health care that we might come to need.

    It’s a negative lottery ticket. We buy it in the hope that the money is wasted, each and every month, that we never “win” this lottery, never need the benefits to which we’re entitled as a result of paying our premiums.

    If we’re permitted to buy the ticket only when we need it, many folks will rationally conclude that they’re much better off waiting until they need it before paying for it.

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