By Kathy Wang ’14, thurj Staff

Economist Paul Romer once claimed: “I think the essence of being an economist…has to do with learning to turn off all your emotions.” However, for K.T. Li Professor of Economics William Hsiao, seeing families without health insurance destroyed by bankruptcy, due to out-of-pocket expenses for medical emergencies, was reason enough to work in the field of health economics.

As of May 2011, 11.4% of Americans are uninsured (Gallup). A 2006 Wall Street Journal article depicted a sobering example of the perils of being uninsured. The article describes Monique “Nikki” White, a woman who died at the young age of 32 from complications of the immune disease lupus, which manifested itself after she was dropped from her state Medicaid program. With pre-existing conditions and the inability to pay for care, she delayed visiting a hospital. But by the time she was granted private insurance and hospitalized, her condition had become so severe that subsequent surgeries and treatments could not save her. Unfortunate cases such as Nikki’s have not only lead to otherwise-preventable deaths and illnesses, but also spikes in health care costs that many people are increasingly unable or unwilling to pay.

Professor Hsiao, a proponent of universal health care, has had a wide range of experience in conducting economic research that enables health care institutions to address rising health care costs. He has been appointed to help design health care reform plans for Colombia, Cyprus, Mexico, Sweden, Taiwan, rural China, and most recently Vermont. His interdisciplinary research often links ideas from economics, politics, and psychology. According to Professor Hsiao, meaningful economic research should rely on the understanding of human behavior—not focusing on the often-unpredictable psychology of individuals, but on social organizations as a whole. The dynamic field of behavioral economics lies at the intersection of psychology and economics; insights drawn from this synthesis may have significant implications for health care reform. Behavioral economists challenge the assumption that humans are economically rational consumers. When faced with complicated situations (such as navigating the health insurance system) or uncertainty (such as not knowing whether one will become sick in the future), people do not always make the optimal decisions that traditional economic theory assumes. In general, individuals tend to discount future benefits compared to the same benefits that would occur at the present. People are sometimes unwilling to pay now for benefits in the future, and because of these tendencies, people may underconsume health care by not paying for preventative care or failing to take early measures to address ongoing health problems. With these findings, Harvard economists Jeffrey Liebman and Richard Zeckhauser suggest that preventative medicine should be subsidized, precisely because it may be underconsumed by the populations that need it.

In order for economists to apply their research and influence health care reform, they must also engage with policymakers and be familiar with the political landscape. Professor Hsiao and his team were appointed by Vermont Governor Peter Shumlin to design and analyze several plans to reform the state’s health care system. Governor Shumlin is a Democrat who ran on a platform open to implementing a new single-payer health care in the state. This platform allowed Professor Hsiao to apply the findings from his economic research, which found many benefits in implementing a single-payer system. On May 26th, 2011, Governor Shumlin signed into law the first single-payer health care system in the U.S., which Professor Hsiao’s team had found to be the most efficient and effective option after extensive research into legal, institutional, and monetary constraints. In the coming years, Vermont is projected to have comprehensive health benefits packages for its entire population, while reducing a total of about 13% of health care expenditures through simplification of administration and decreased system abuse.

Professor Hsiao notes that a policy that works in one state or country may not work in another because of different economic climates, political constraints, or national values. Nevertheless, it should be noted that China and the U.S. are both plagued by rising costs of care and large uninsured populations. The three contributors to the increasing cost of health care spending that Professor Hsiao has been most interested in addressing are the high cost of medical technologies and drugs, inefficiencies in administration, and lack of coverage. The true price of new medical technologies and drugs are often hidden from patients, and unnecessary tests are frequently run. In his study of China, Professor Hsiao found that doctors often prescribe three different antibiotics to treat one common infection. Such waste of resources contributes to the growing cost of care. In order to address these issues, Professor Hsiao has stressed the importance of restructuring incentives to change behavior and reduce cost. For example, as part of a study conducted in rural western China in early 2000, Professor Hsiao and his research team found that restructuring the payment method for medical care would increase safety standards, and competitive bidding of drugs could substantially lower costs. In this study, published in Health Economics and titled “The Impact of Rural Mutual Health Care on Health Status: Evaluation of a Social Experiment in Rural China,” a centralized office selected the most qualified village doctors, who were then given a base salary and a bonus based on the health outcomes of their patients, instead of services provided. This change in payment incentives helped resolve the issue of over-prescribing drugs. To lower the cost of drugs, the responsibility of purchasing drugs was shifted from individual doctors to health centers. The health centers purchased drugs in bulk through competitive bidding, where competing vendors bid to sell to a customer, who buys from the vendor with the lowest price. According to the study, the competitive bidding process lowered drug costs by as much as 30%.

Perhaps Romer was not completely correct in his belief about economics being void of emotions. Indeed, behavioral economics and research in health care systems implicate strong emotional connections—hopes, fears and motivations—of the people studied, the policy-makers, and even the researchers themselves.