Hawaii Employees, Brand Name Drugs, and Status Quo Bias

Today's Honolulu Advertiser has a worthwhile story about the State Employees Drug plans. The article essentially says that for cost savings measures various things have ocurred, many of which have angered state employees.

This highlights though an interesting question, and one that runs deeper within our framework of health care. One of the key ideas is that it requires generic drugs before one can get an exception of coverage for the brand name. You can still use the brand name if available, but you must pay both the generic copay and the price differential. Often the price differential is huge.

Study after study shows that generic drugs are just as effective as brand drugs except in certain cases. Yet, we still continue to use brand name drugs, and people often choose them. What then happens is they pay the higher brand name co-payment, but the cost is hidden, by the insurance picking up the tab.

This is not any way for a rational market to act. I sort of think that the structure of this new plan with regard to this one matter is probably the right move. It would control costs without any quality changes, and if there are problems, one can get an exception.

However, the outrage stems from a sense of the idea that "my doctor has prescribed this, and I have always taken this, why do you force me to change." That is the classic status quo bias. This bias sort of grows in our health care system, because so often it does not put pressure on people to change. Doctors too are notorious for status quo bias, often doing procedures that do not work, partly because that was how they were trained, it is difficult to stay abreast of the literature, and they often do not have any incentives to do otherwise.

Changing people's behavior is what we are trying to achieve here. The greater question that arises is if A is just as effective as B, but A costs 3 times more, why pay for A? Would not a rational market and consumer go towards B? That's sort of what this generic argument is about.

Or put another way, the state's new plan really is looking at the forgotten part of my favorite equation.

C = U x P

That would be the P. However, as I have stated earlier, and as the article itself shows, the resistance to P is much higher. Partly it is this strong status quo bias. Partly too, it disrupts in a deeper way vested interests in the system.

One final note. Liberals too should embrace cost sharing. I link back to our good friend Ezra Klein talking about various schemes in this manner.