Session 056 PD - Applying Behavioral Economics Theory to Group Benefits. Moderator: Randall Paul Herman, FSA, MAAA

Transcription

1 Session 056 PD - Applying Behavioral Economics Theory to Group Benefits Moderator: Randall Paul Herman, FSA, MAAA Presenters: Randall Paul Herman, FSA, MAAA John R. Murphy, FSA, MAAA Geoffrey Sanzenbacher, Ph.D. SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer

2 056 PD - Applying Behavioral Economics Theory to Group Benefits RANDALL HERMAN, FSA, MAAA JOHN MURPHY, FSA,MAAA GOEFFREY SANZENBACHER, PHD 2017 SOA Annual Meeting & Exhibit Monday, 10/16/2017, 3:30 pm - 4:45 pm

3 SOCIETY OF ACTUARIES Antitrust Compliance Guidelines Active participation in the Society of Actuaries is an important aspect of membership. While the positive contributions of professional societies and associations are well-recognized and encouraged, association activities are vulnerable to close antitrust scrutiny. By their very nature, associations bring together industry competitors and other market participants. The United States antitrust laws aim to protect consumers by preserving the free economy and prohibiting anti-competitive business practices; they promote competition. There are both state and federal antitrust laws, although state antitrust laws closely follow federal law. The Sherman Act, is the primary U.S. antitrust law pertaining to association activities. The Sherman Act prohibits every contract, combination or conspiracy that places an unreasonable restraint on trade. There are, however, some activities that are illegal under all circumstances, such as price fixing, market allocation and collusive bidding. There is no safe harbor under the antitrust law for professional association activities. Therefore, association meeting participants should refrain from discussing any activity that could potentially be construed as having an anti-competitive effect. Discussions relating to product or service pricing, market allocations, membership restrictions, product standardization or other conditions on trade could arguably be perceived as a restraint on trade and may expose the SOA and its members to antitrust enforcement procedures. While participating in all SOA in person meetings, webinars, teleconferences or side discussions, you should avoid discussing competitively sensitive information with competitors and follow these guidelines: Do not discuss prices for services or products or anything else that might affect prices Do not discuss what you or other entities plan to do in a particular geographic or product markets or with particular customers. Do not speak on behalf of the SOA or any of its committees unless specifically authorized to do so. Do leave a meeting where any anticompetitive pricing or market allocation discussion occurs. Do alert SOA staff and/or legal counsel to any concerning discussions Do consult with legal counsel before raising any matter or making a statement that may involve competitively sensitive information. Adherence to these guidelines involves not only avoidance of antitrust violations, but avoidance of behavior which might be so construed. These guidelines only provide an overview of prohibited activities. SOA legal counsel reviews meeting agenda and materials as deemed appropriate and any discussion that departs from the formal agenda should be scrutinized carefully. Antitrust compliance is everyone s responsibility; however, please seek legal counsel if you have any questions or concerns. 44

4 Presentation Disclaimer Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice. 45

5 Presentation Agenda Behavioral Economics of LTD Claims Management Results from an Employee Enrollment Experiment for a State Retirement Initiative Behavioral Economics Applications For Group Health Insurance Wrap-up / Discussion 2

6 Are People Rational Decision Makers? Not always. Thinking is hard. We constantly take mental shortcuts when making decisions. Psychologists refer to this as cognitive bias By recognizing that people consistently behave in a seemingly irrational manner, group benefit programs can be designed and managed in ways that will improve desired outcomes. 3

7 Behavioral Economics of LTD Claims Management

8 Behavioral Economics of LTD Claims Management September 7, 2017 John Murphy

9 Learnings from behavioral economics relevant to group disability claims management The group disability packaging conundrum Advance pay and close The return to work mindset Social Security s perverse incentives 2017 SOA Annual Meeting 16 October

10 The Financial Gap 2017 SOA Annual Meeting 16 October

11 Incentives 2017 SOA Annual Meeting 16 October

12 Seamless transition 2017 SOA Annual Meeting 16 October

13 Status quo bias 2017 SOA Annual Meeting 16 October

14 Advance payments 2017 SOA Annual Meeting 16 October

15 Risk aversion 2017 SOA Annual Meeting 16 October

16 Framing 2017 SOA Annual Meeting 16 October

17 Social Security s perverse incentives 2017 SOA Annual Meeting 16 October

18 Results from an Employee Enrollment Experiment for a State Retirement Initiative

19 Results from an Employee Enrollment Experiment for a State Retirement Initiative Geoffrey Sanzenbacher Research Economist Center for Retirement Research at Boston College Society of Actuaries Annual Meeting Boston, MA

20 The problem: only half of private sector workers have coverage at any given point. Percentage of Private Sector Workers Ages Offered an Employer-Sponsored Retirement Plan, % 80% 60% 40% 20% 0% Source: U.S. Census Bureau, Current Population Survey Annual Social and Economic Supplement,

21 But Congress has not passed any legislation, so have stepped into breach. State Retirement Security Activity, as of August 2016 Failed legislative initiative No activity Active legislative initiative Auto-IRA enacted Marketplace enacted Source: Authors analysis.

22 The Auto-IRA is a promising approach for expanding coverage. States will require employers not offering a qualified plan to enroll workers in an IRA. o States have typically decided on a Roth structure to avoid penalties on withdrawals. o Initially, states considered a MEP, but such an approach would have to be voluntary for employers. Workers contributions will be deducted automatically from their paychecks, but workers can opt-out at any time.

23 Automatic enrollment has been shown to increase participation in 401(k)s. 20 But little research had focused on how uncovered workers would respond to being automatically enrolled in an IRA. Because uncovered workers differ from covered ones, Connecticut asked CRR to answer two questions: 1. Do uncovered workers behave like covered ones when automatically enrolled in a retirement savings program? 2. How do workers respond to program features not yet tested in the research literature, but proposed in Connecticut s legislation?

24 21 Our approach Instead of asking about preferences over different options, study presented each worker one program with certain features. Workers were asked whether they wanted to opt out of the program after reading the program description. o This decision is not exactly like auto-enrollment because the worker is immediately given the option to opt out. o Under present law, this setup is not realistic since no way to default people automatically.

25 22 For example, some workers see the base case program design. Imagine you re offered the chance to participate in a retirement program at work. Please read the information about the program offered (below) and select the choice you d likely make if this program were offered to you in reality. Your employer will automatically deduct a contribution each paycheck (just like it does for Social Security), and deposit the money into a retirement account in your name. Your savings will be invested and grow over time to provide you with income in retirement. Some important features of this program: 6 percent of your pay, or $60 per every $1,000 you earn, will be deducted and deposited into your account. You can change how much you contribute to your account once a year and can stop contributing at any time by opting out of the program. The money will be invested in a fund appropriate for someone your age, managed by a private company selected by the State of Connecticut. You can withdraw your contributions without penalty at any time; you pay taxes on your contributions up front. You can access all of your account balance (contributions plus investment earnings) without penalty or taxes when you retire. Detailed information on the program can be found here.

26 23 Other workers see a program with a 3- percent default contribution rate. Imagine you re offered the chance to participate in a retirement program at work. Please read the information about the program offered (below) and select the choice you d likely make if this program were offered to you in reality. Your employer will automatically deduct a contribution each paycheck (just like it does for Social Security), and deposit the money into a retirement account in your name. Your savings will be invested and grow over time to provide you with income in retirement. Some important features of this program: 3 percent of your pay, or $30 per every $1,000 you earn, will be deducted and deposited into your account. You can change how much you contribute to your account once a year and can stop contributing at any time by opting out of the program. The money will be invested in a fund appropriate for someone your age, managed by a private company selected by the State of Connecticut. You can withdraw your contributions without penalty at any time; you pay taxes on your contributions up front. You can access all of your account balance (contributions plus investment earnings) without penalty or taxes when you retire. Detailed information on the program can be found here.

27 24 While other workers see a program with a deferred annuity, or some other design. Imagine you re offered the chance to participate in a retirement program at work. Please read the information about the program offered (below) and select the choice you d likely make if this program were offered to you in reality. Your employer will automatically deduct a contribution each paycheck (just like it does for Social Security), and deposit the money into a retirement account in your name. Your savings will be invested and grow over time to provide you with income in retirement. Some important features of this program: 6 percent of your pay, or $60 per every $1,000 you earn, will be deducted and deposited into your account. You can change how much you contribute to your account once a year and can stop contributing at any time by opting out of the program. The money will be invested in a fund appropriate for someone your age, managed by a private company selected by the State of Connecticut. You can withdraw your contributions without penalty at any time; you pay taxes on your contributions up front. You can access 85 percent of your account balance without penalty or taxes when you retire. The remaining 15 percent of your account balance will be used to provide you with monthly payments that will start at age 82 and continue as long as you live (like your Social Security Benefit). If you die before your spouse, he/she will continue to receive half of your monthly benefit for as long as he/she lives. Detailed information on the program can be found here.

28 25 Uncovered workers in base case behaved similarly to workers in the real world. 18 percent opted out of the program, only slightly higher than studies of covered auto-enrolled workers. Opt-out rates did not differ significantly between scenarios with 3-percent and 6-percent default contribution rates.

29 26 Opt-out rates varied by demographics consistent with expectations. Opt-out Rates Under Base Case for Select Demographic Groups 30% 20% 10% 17.9% 14.6% 21.2% 21.7% 15.9% 19.2% 14.6% 0% Male Female White Non white Overall By age By gender By race/ethnicity Source: Knowledge Networks Survey of Uncovered Workers.

30 27 Connecticut was also interested in how specific features relevant to their legislation would affect opt out. Auto-escalation Roth versus traditional IRA design Frequency of allowed contribution changes Guarantees Annuitization as default withdrawal method

31 28 To analyze the response across different scenarios, regression analysis was used. The regression analyzed each worker s decision to participate based on whether they saw the base case or another feature. o The regression controls for age, income, gender, and race. The coefficient on each feature tells how much more or less likely a person is to participate relative to the base case. o A statistically significant coefficient means the observed difference is not due to chance.

32 The regression analysis was conducted as a simple linear probability model. 29 The regression compared the sample of individuals who saw the base case to a sample who saw that scenario: Pr OOOOOO oooott ii = ββ 0 + ββ 1 NNoooooooooooo ii + ββ 2 WWWWWWWee ii + ββ 3 aaaaee ii + ββ 4 MMMMMMee ii + ββ 5 IIIIcc ii + εε ii The coefficient ββ 1 is the difference in opt out for two otherwise similar individuals viewing different programs. o When positive and significant, it indicates the feature caused higher opt out than the base case.

33 30 Contribution rates: Auto-escalation leads to higher opt-out than a 6-percent default. 30% Opt-out Rates Under Various Contribution Rate Options 24.5% 20% 17.9% 16.8% 10% 0% Base case (6% contribution) 3% contribution 6% contribution escalating to 10% Note: Solid bar significantly different from base case at 5-percent level. Source: Knowledge Networks Survey of Uncovered Workers.

34 31 IRA structure: Roth preferred, but allowing frequent changes to contribution rate has no effect. Opt-out Rates Under Various IRA Structures 30% 20% 17.9% 22.9% 17.0% 10% 0% Base case (Roth, Change once per year) Traditional IRA Change contributions 4 times per year Note: Dotted bar significantly different from base case at 10-percent level. Source: Knowledge Networks Survey of Uncovered Workers.

35 32 Guarantee: Offering a guarantee significantly increases opt out when cost made clear. Opt-out Rates With and Without Guarantee 40% 30% 32.3% 20% 17.9% 10% 0% Base case (No guarantee) Guarantee (1% rate of return, but not likely to exceed 1%) Source: Knowledge Networks Survey of Uncovered Workers.

36 33 Annuitization: Respondents opted out more with deferred annuity, no reaction to others. Opt-out Rates Under Various Annuitization Options 30% 20% 17.9% 24.3% 15.3% 17.3% 10% 0% Base case (No annuitization) 15% of balances in annuity with payout starting at 85 50% of balances All balances Immediate annuity at retirement Source: Knowledge Networks Survey of Uncovered Workers.

37 34 Conclusion The base case is a good place to start nothing resulted in significantly lower opt out. o Roth, 6-percent contribution rate, target date fund selected by state, annual contribution rate changes, no guarantee. Certain features may lead to higher opt-out: o Auto-escalation to 10-percent contributions; o Using a traditional IRA structure (marginally); o A guarantee that limits upside returns; and o Including an automatic deferred annuity.

38 Behavioral Economics Applications For Group Health Insurance

39 Study One: Employees don t always make sensible plan coverage choices. Researchers studied the health plan choices made by 23,894 single coverage employees at a U.S. firm over two years. Build your own benefits: Deductible: $1000, $750, $500, $350 Max Out Of Pocket: $3000, $2500, $1500 Coins % / Copay: 90%, 80%, $15/$40, $25/$35, All options featured the same insurer and the same provider network. Employee cost to reduce deductible almost always exceeded deductible savings. Financially, it almost never made sense to choose anything but the $1,000 deductible. Source: Bhargava, S., Loewenstein, G., and Sydnor, J. Choose to Lose: Health Plan Choices from a Menu with Dominated Options, Quarterly Journal of Economics, Vol. 132, Issue 3, pp

40 Study One: Employees don t always make sensible plan coverage choices. Most employees did not choose rationally! Only 37% chose the $1000 deductible. Low income employees tended to choose lower deductibles. Higher users (women, aged, chronic condition) tended to choose lower deductibles. Year two migration to higher deductibles did not significantly change the result. How to improve results? Simplify Choices? Not much improvement Improve Understanding? Literacy tied to choice quality 37

41 Study Two: How we name plans will impact choice. Researchers examined the plan choices made by study participants using several plan naming conventions Participants were first asked questions about their demographic, financial anticipated health usage. Participants asked to choose among three plans whose benefits and premiums mirrored an average Bronze, Silver and Platinum plan on the ACA exchange. Participants were then randomly assigned to choose one of three health plans using one of the following naming conventions (the three health plans were identical in all cases except for the name of the plan): Metal Labels: Bronze, Silver, Platinum Generic Plan Labels: Plan A, Plan B, Plan C Medical Use Labels: High-Use, Medium-Use, Low-Use Recommend with Generic Plan Labels Results analyzed for appropriateness of choice Source: Bhargava, S., Loewenstein, G., and Benartzi, S. The Costs of Poor Health (Plan Choices) & Prescriptions for Reform, Behavioral Science & Policy, Vol. 3, Issue 1, pp. 1-12,

42 Study Two: How we name plans will impact choice. Results Appropriately Insured lowest for Metal Names as is Over-insured when compared to other options. Some people use quality in names as a mental shortcut for choice. Under-insured rate greatest when Medical Use names used (also greatest rate of Appropriately Insured). People tend to overestimate their own position (wealth, health, etc.) Are the Medical Use labels the best option? 39

43 Study Three: Creative incentives can improve program uptake. Researchers examined the completion rates for Health Risk Assessments using three incentive designs. $25 incentive payment for completion of a Health Risk Assessment Researchers tested two additional incentive programs: Control: Employee Received $25 payment for HRA Completion Direct Payment: Employee Received a $25 Grocery Gift Certificate in addition to the $25 payment Lottery: Employees were divided into teams of four to eight employees. One in four teams were randomly selected as winners and all team members who had completed the HRA received additional payments of: $100 if <80% had completed HRA $125 if >=80% had completed the HRA Lottery designed to be actuarially equivalent to $25 direct payment. Source: E Haisley, KG Volpp, T Pellathy, G Loewenstein. The impact of alternative incentive schemes on completion of health risk assessments, American Journal of Health Promotion 26 (3),

44 Study Three: Creative incentives can improve program uptake. Results Lottery approach clearly the winner, especially with lower income employees. Regret Aversion Majority of teams reached 80% goal Social Pressure Lottery type programs have been shown to be effective for one time or annual programs such as HRAs or flu shots. 41

45 and the Nobel Memorial Prize in Economic Sciences goes to RICHARD THALER! Thaler Didn t Want to Be An Actuary Thaler was born and raised in northern New Jersey with two younger brothers. His mother was a school teacher turned stay-at-home-mom. His father rode the train daily to Newark, where he was an actuary at Prudential. "He thought that if I was a real man, I would have become an actuary, that economics was a poor-man's actuary," Thaler said, seemingly only half joking. "He was an influence in that I knew I didn't want to do that." Reflecting further, he said, "It's not so much that I didn't want to be an actuary, it's that I didn't want to be a businessman." Why? "Lousy subordinate," Thaler said of himself. Chicago Tribune October 10, 2017

46 Questions?

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