In the German statutory health insurance system, the costs for employee’s health insurance coverage are in most cases split between the employee and the employer. For the last couple of years, every member of a statutory health insurance fund in Germany had to pay 7,3% of its gross wage along with an extra contribution of 0,9%. In addtion, the employers had to pay another 7,3% for every employee they had. So lets assume that an employee got a monthly gross pay equal to 4.000€. The individual contributions of every employee amounted to 8,2%, which would in this case be 328€. Along with this payment, the employer had to pay 292€, which equals 7,3% of the employee’s gross wage. All in all, a gross pay of 4.000€ results in a cash flow of 620€ to the health insurance companies.
Starting this year, a law was enacted that changed the payment modalities of the German statutory health insurance system. The major difference is the change from the fixed additional contribution of 0,9% to a flexible additional contribution that can be determined by every health insurance company on its own. Looking at the recent publication of these individual contribution rates shows considerable differences between some insurance companies. For instance, the BKK Euregio asks for an additional contribution rate of 0,0%, while the Brandenburgische BKK demands an additional 1,3% of the gross pay. Going back to the example given above, this means a difference of 52€ per month or 624€ per year. From a thoroughly rational perspective, it would thus make sense to change the health insurance provider, right? Not really!
Although no data is published on people’s switching patterns so far, it seems unlikely that a large amount of people will change their statutory health insurance provider in reaction to these new payment policies. And there is empirical evidence supporting this guess. In 2013 as well as 2014, the Techniker Krankenkasse paid a premium equal to 80€ for every insured person. This payback policy was announced in September 2013. Additionally, the Techniker Krankenkasse declared that every person with an insurance contract on December 1st, 2014 would receive this premium of 80€ independent of the length of the insurance relationship. Thus, you could have been a member of the Techniker Krankenkasse since November 2014 and still receive the premium of 80€. And since this policy was already announced more than a year before, there would have been enough time to switch the health insurance provider... But did this really happen?
A look at the data seems to support the notion that this policy helped to acquire new members. In 2014, the Techniker Krankenkasse was by far the most popular health insurance provider attracting almost 200.000 new members in comparison to the AOK Bayern which attracted as little as 32.000 new members while ranking second in regard to overall member growth. But did these 200.000 new members really came because of the premium? No! Looking at figures about membership decline of statutory health insurance providers draws a different picture. The DAK-Gesundheit lost 13.000 and the AOK Nordost lost only 4.500 members ... and they ranked first and second concerning overall decline of members. This implies that a majority of Techniker Krankenkasse’s new members likely did not come from other statutory health insurance companies, but rather from private health insurance providers with completely different payment arrangements. It was not the financial incentives in comparison to other statutory health insurance providers, but rather the discontent with the private health insurance system and provider that brought new members to the Techniker Krankenkasse.
But why did not more people opt to leave their old statutory health insurance provider in order to gain 80€ for free? The homo oeoconomics that is assumed in so many neoclassical economic models would switch insurance providers immediately, but the majority of insured people did not decide to do so... Is neoclassical economics fundamentally flawed? Is it unable to predict actual human behavior? In a way yes. Most economic models assume a human being to have a certain set of preferences and to make rational desicions in line with these preferences. And in times of Smith or Ricardo, it might have been easy to assume humans to make these kinds of rational decisions. But increasing complexity in all areas from international policits or economics to agriculture and geology makes perfect rationality a theoretical construct with almost no practical relevance. And this is where Behavioral Economics might step up to fill the gap.
One very important concept of Behavioral Economics is called loss aversion and it refers to our human tendency to prefer avoiding losses over acquiring gains. This phenomenon was demonstrated by a study in 1987. For this study, three researchers went to a shopping mall in order to recruit respondents. The study participants had to make statements about an insecticide, which the researchers said would cost $10. In addition to the positive effects of this insecticide, the participants were informed that it can cause injuries like skin poisoning if misused. This was supposedly happening in 15 out of 10.000 bottles sold. After receiving this information, the participants had to say how much money they would pay in addition to the $10 in order to completely eliminate the risks of injuries: On average, they were willing to pay $3,78 more. Moreover, the researchers asked how much the price of the insecticide would have to be reduced, when the risk of injury increases by 1 to 16 out of 10.000 bottles. Taking into account that the participants would pay $3,78 more in order to reduce the risk by 15, it seems likely that they would not ask for a drastic price reduction, when the risk of injury is increased by 1. But what happened makes a convincing case for our innate loss aversion: From the 672 participants asked, a whopping 77 percent of the respondents would not buy the insecticide at any positive price, when the risk is increased by 1. They were willing to pay $3,78 more for reducing the risk of injury by 0,15%, but the majority would not buy the product at all, if the risk is increased by 0,01%.
Coming back to the new payment policies of German statutory health insurance providers, loss aversion might also help to explain why people are not going to switch their providers, even though they could save money by doing so. As the study of loss aversion shows, individuals value gains less than they fear losses and if they did not make any negative experiences with their health insurance provider, why should they change it? Sure, they can save money, but what are the payoffs for that? Does another service provider cover the same services as the current health insurance provider? What are the differences in their service portfolios? How can the people be sure that the cheaper health insurance provider will not increase their individual contribution rate in the long run? These questions cannot be answered immediately and thus will likely hinder an individual to switch providers. And even if the service portfolios would be identical, a lot of insured people would not switch providers, because it would require a detailed analysis or a couple of phone calls in order to figure out this exact identity. And since only very little people would make this effort, the cheaper prices do for most people not outweigh the potential risks for changing a running system.
And this information is very important for policy makers as well. In an increasingly complex world, legislation should also focus on the actual nature of human beings. Sure, we are to a certain extent rational and it is good that policy is addressing our reflective, rational side - the homo oeconomicus within that evaluates all incoming information. But in order to increase effectiveness of government interventions, it makes sense to also address our unconscious, automatic side - especially when our world is becoming so complex that nobody has all information in order to make a truly rational decision. The next article is taking a closer look at some government initiatives focussing on our automatic, unconscious side.
W. Kip Viscusi, Wesley A. Magat & Joel Huber (1987): “An Investigation of the Rationality of Consumer Valuations of Multiple Health Risks” The RAND Journal of Economics, 18, 465-479.