June 26, 2009
How much is health insurance worth?
By Cindy Ivanac-Lillig
I recently attended an interesting seminar on Behavioral Economics presented by an economist who works at the Boston Fed’s Research Center for Behavioral Economics and Decisionmaking. It is the only center of its kind in the Federal Reserve System. In a nut shell, Behavioral Economics does not disagree with traditional economic theories, but rather attempts to apply psychology and sociology to explain the gap between what traditional economic theories would predict people would do and what happens in reality. At its essence, it tries to explain why we do not always behave ‘rationally.’
Personally, I think a lot of these studies wouldn’t hold much water if they accounted for relative wealth. Consider this example often used by behavioral economists: If you offered someone a choice of $95 today or $100 next month, many would take the $95 today even though waiting a month would result in annualized rate of return of over 60%. I haven’t researched it, but I would bet that folks with a lot of assets would be more likely to choose to wait a month, and folks with few assets would be less likely. The benefit of having the money sooner for someone who has less of a safety net is much higher than for the person who does not consider the money’s value part of his/her safety net. This is just a hunch (but I do remember my college checkbook).
As I was sitting in this lecture debating with the speaker (in my head, of course), this concept of ‘safety net’ value came to me and sparked the idea for this blog. We have just begun to talk about healthcare reform and it is a great opportunity for economists and those studying economics to consider the costs and benefits of a service that is quite difficult to value due to its complex social value. The easy parts of the healthcare reform valuation are: How many preventable conditions go to emergency rooms and how much does that costs taxpayers? What surgical costs could be eliminated with preventative care? How much will the program cost?
However, what is much more difficult to value, but much more interesting, is the value of the health care ‘safety net’ itself. Would this perceived value tilt the cost/benefit scale for individuals in jobs they currently don’t like or are undervalued, making the overall job market more flexible and more efficient? Would improved health lead to greater productivity gains, and even raise our potential growth levels? Would the reduced worry about health insurance, in fact, make people healthier? It may be easy to say ‘yes’ to these questions, but if someone were to sit you in front of a spreadsheet and ask by how much, this would be harder.
In conclusion, maybe what Behavioral Economics brings to the table for me is the idea that there is psychological and sociological value to decisions that are hard to measure. Although, I would still say that, on the whole, people are rational in weighing costs versus benefits, but their value judgments differ based on their life circumstances. What do you think?
Posted by Cindy at June 26, 2009 9:41 PM
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great work, carry on the great blog.
Posted by: Latoyia Sickel at December 23, 2011 1:07 PM
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