Health Psychology Review

Vol. 2, No. 1, March 2008, 2
19

What can health psychologists learn from health economics: from monetary
incentives to policy programmes
Yaniv Hanoch* and Michaela Gummerum

School of Psychology, University of Plymouth, Drake Circus, Plymouth, UK

(Received 19 December 2007; final version received 30 June 2008)

Health economists and health psychologists share many common goals, such as
reducing the number of smokers, improving the therapeutic outcome for children with
attention deficit hyperactivity disorder, and helping disadvantaged groups gain better
access to health services, but there has been little collaboration between the disciplines.
Health economists, in fact, have played the greater role in shaping the American health
care system. This, we believe, is a serious oversight on the part of psychologists, who
have much to contribute to health policy development through their understanding of
cognitive and emotional processes. It is our hope that this paper will encourage health
psychologists to engage in dialogue and seek collaboration with (health) economists, as
well as conceive of novel ways to apply economic models and methodologies in their own
practices.
Keywords: attention deficit hyperactivity disorder; health economics; health psychology;
money; smoking

Introduction
In December 2006, a survey by the Kaiser Family Foundation and Harvard School of
Public Health (2006) found that one of the public’s top concerns in the 2006 US
congressional elections was health care. When asked what they would like the 2008
presidential candidates to talk about, 20% of the respondents mentioned health care
issues. A later survey (Kaiser Family Foundation, 2007) revealed that health care is the
second most important topic in general and the top domestic issue the public wants the
government to address. It is no wonder, then, that all the 2008 presidential candidates
have unveiled their health care plans at the early stages of their campaigns. While the
candidates’ plans might differ, all address two (related) factors: health coverage (i.e.,
insurance), and the cost of medical services. Given these two concerns, it is not surprising
that (health) economists have been assuming key roles in assisting presidential candidates
in designing their health care plans (as they have done in many previous elections) and
shaping the future of the health care system. To the best of our knowledge, not a single
(health) psychologist has been involved in the process. Psychologists are likely, as a
consequence, to have only a marginal impact (if at all) on any reform that might emerge.
This is an omission that psychologists should strive to correct. After all, health
economists and psychologists aim to achieve similar goals: increase healthy behaviours
and reduce unhealthy ones. Furthermore, given the complexity of the health care system,

*Yaniv Hanoch. Email: yaniv.hanoch@plymouth.ac.uk

ISSN 1743-7199 print/ISSN 1743-7202 online

# 2008 Taylor & Francis
DOI: 10.1080/17437190802311353
http://www.informaworld.com
 Health Psychology Review 3

health care professionals, economists, and policy makers often rely on psychological
foundations
whether explicitly, or more often implicitly
in their decision-making
processes.
Health economics is the branch of economics that deals with the provision of health
care services, their delivery, and their use, with special attention to quantifying the
demands and measuring outcomes for such services, the social, financial, and opportunity
costs of such services, and of their delivery, and the benefits obtained. More emphasis is
given to the costs and benefits of health care to a population than to the individual (see
http://www.academyhealth.org/publications/healtheconomics.htm). Relying on economic
principles, economists are able to study a range of phenomena, such as smoking
prevention, physician reimbursement and performance, mental health, urban and rural
utilisation of health services, and health disparity. In more than one respect, using money

say, to predict demand for screening procedures or to compare two treatment options

gives economists a powerful tool to study a broad a range of health-related topics.
Monetary value is, relatively speaking, easy to measure; it provides a standardised and
clearly defined outcome measure, allowing economists to conduct cost-effectiveness
analyses of different treatments or options; just as importantly, it is easily understood
by policy makers.
Given the influential role economists have played in shaping public health policies, we
believe that health psychologists would benefit from greater familiarisation with the
methodologies, theories, and tools of economics. This idea is not without precedent.
Economists and psychologists have been collaborating fruitfully in the domain of
judgement and decision making, leading to the adoption of new techniques on both
sides. Similar exchange could enrich the field of health psychology. Health psychologists,
for example, could incorporate monetary incentives into their experimental design; they
could familiarise themselves with economic research on cost-effectiveness analysis; and
finally, they could take a more global (population-based) perspective. While we discuss
these issues more fully below, it is important to note that we are not arguing that
psychologists should turn into economists but rather, that bringing the two fields together
could prove to be useful in tackling the diverse and complex problems the health care
system faces.
The aims of this paper are, therefore, to introduce to health psychologists a few of the
key ideas of health economics, and to illustrate the utility of employing them in their own
research. To do so, we discuss areas
smoking and attention deficit hyperactivity disorder

where economics has made a substantial contribution. Our discussion is not meant to
suggest that health economists should replace health psychologists, or that economic tools
are in any way superior to the tools employed by psychologists. Rather, we merely posit
that economic thinking and methodology could supplement and enrich the approaches
currently employed by health psychologists, and vice versa. Together, economists and
psychologists might produce more comprehensive (and hence more effective) interventions.
We are also suggesting that policy makers have seen health care as an economic issue (a
question of what should be funded given our scarce resources) and thus have largely relied
on economists, whereas psychologists could contribute through their research on and
understanding of issues not addressed by economists. For example, psychologists have long
been interested in what are the best ways to represent statistical information to patients, in
evaluating the non-monetary costs and benefits of intervention, and is developing new, and
more efficient, interventions.
4 Y. Hanoch and M. Gummerum

Smoking and health economics

Between 1991 and 2002 the number of people who smoked in New York City remained
stable, with slightly more than 21% of the population identified as smokers. North
Carolina reported similar statistics, where the number of smokers showed very little
fluctuation until 2006.
In 2002, New York City (and New York State), and in 2006 the state of North
Carolina, increased the sales tax on tobacco. While North Carolina increased the tax from
$0.05 to $0.35 per pack of cigarettes, New York City’s increase was more dramatic, from
$0.08 to $1.50 per pack (this was in addition to a New York State increase of about $0.40
per pack during the same time period). Shortly after the sales tax increase came into effect
(and prior to the introduction of a smoking ban in public places), New York City officials
reported that the number of smokers decreased by 11% (Frieden et al., 2005), and in North
Carolina cigarette sales fell by 18%. It seems that an increase in cigarette prices had a direct
and substantial effect on the number of people who smoke and/or the number of cigarettes
purchased. Such findings would come as no surprise to many economists, who have long
been aware of the phenomenon of price elasticity. Derived from the law of demand (one of
the fundamental laws in economics), price elasticity tells us how responsive people are to
price changes: As price goes up, ceteris paribus, demand is predicted to go down. Thus, the
theory predicts an inverse relationship between price and consumption, creating what
economists call a downward-sloping demand curve (see Rice, 2003).
Smoking is the leading cause of preventable death (Harrell, Bangdiwala, Deng, Webb,
& Bradley, 1998). The Surgeon General’s Office has maintained that many leading causes
of death have behavioural components, and thus it recommends ‘that behavioral risk
factors (e.g., smoking) be the main focus of efforts in the area of health promotion and
disease prevention’ (American Psychological Association, 2007). In light of the Surgeon
General’s recommendations, it is no wonder that smoking has attracted much attention
from economists and psychologists. However, the two fields have employed different
methodologies to achieve the following goals: (i) reduce the number of people who start to
smoke; and (ii) increase the number of smokers who quit. Economists, as the New York
City example illustrates, have focused on the relationship between price and behaviour. In
the following, we discuss how economists have used this relationship to suggest ways to
reduce the number of people who start to smoke, and increase the number of people who
quit.
In the USA, prevention programmes tend to concentrate on the young. Indeed, many
schools across the country have used such programmes to increase awareness of the risks of
certain behaviours, such as smoking. California alone spent over $400 million from 1989 to
2003 to prevent teenagers from starting to smoke. One of the rationales behind school-
based prevention programmes is the fact that many risky behaviours emerge during young
adulthood. Indeed, over 80% of adult smokers started smoking prior to their 18th birthday
(Harrell et al., 1998). However, educators, policy-makers, and researchers have faced
various hurdles in their attempt to reduce smoking rates and increase quitting rates among
the young. One of the challenges they encounter is the tendency of the young to
underestimate their risk as well as their probability of becoming addicted (Johnston,
O’Malley, & Bachman, 2001). To date, many methods have been utilised to combat youth
smoking. In addition to school-based programmes, the legislative branch, for example, has
passed laws prohibiting the sale of tobacco to minors (e.g., the Synar amendment). How
successful have these programmes been?
 Health Psychology Review 5

A systematic review by Wiehe, Garrison, Christakis, Ebel, and Rivara (2005; see also
Glantz & Mandel, 2005) questioned the merits of school-based prevention programmes,
and others have had reservations about the value of legislative acts in preventing youths
from taking up smoking (but see Sussman, Unger, Rohrbach, & Johnson, 2005). Wiehe et
al. (2005) analysed randomised controlled trials to evaluate the short- and long-term
effects of different school-based prevention programmes. While a number of programmes
produced short-term success, only one of the eight studies reviewed found a significant
long-term effect (i.e., a lasting reduction in the number of young smokers). If school-based
programmes
which are largely grounded on psychological theories such as the theory of
planned behaviour (Ajzen, 1991), the theory of triadic influence (Flay & Petraitis, 1994),
and social cognitive theory (Bandura, 1997)
have little success in reducing the number of
youth who smoke, what other measures might do better?
Price increase seems to be the most successful predictor in smoking prevention and
reduction: It decreases the number of youth who report intention to smoke, while
increasing the number who intend to quit smoking. In their seminal work, Lewit, Coate,
and Grossman (1981) were among the first to examine the relationship between economic
factors (price) and youth smoking. Analysing a national sample of close to 7000 youth (12

17 years old), they found that adolescents exhibit price elasticity of
1.44. A price elasticity

the relationship between price and demand
of
1.44 means that an increase in cigarette
price of 10% leads to a 14.4% decrease in the number of smokers. More importantly
perhaps, Lewit et al. found that young adults (vs. older adults) are more price sensitive (US
Department of Health and Human Services, 1994). In other words, an increase of $1 will,
on average, have a greater effect on a young person than on an older one. While some of
Lewit et al.’s findings have been challenged, the general message
that economics and
behaviour are connected
still stands.
Based on a series of national surveys, Chaloupka and his colleagues (Chaloupka,
Grossman, & Saffer, 2002; Ross & Chaloupka, 2004) analysed the relationship between
price and youth smoking trends. In one study, Ross and Chaloupka (2003) studied smoking
behaviour of a nationally representative sample of over 17,000 high school students.
Similar to Lewit et al. (1981), Ross and Chaloupka (2004) found an inverse relationship
between price and consumption: As the price of cigarettes increased, demand for cigarettes
declined. In fact, their data show that a small increase of $0.50 per pack in cigarette price
could lead to a substantial reduction in smoking of about 18%. Using a sample of over 200
schools (with over 17,000 participants) across the USA, Ross, Powell, Taurus, and
Chaloupka (2005) examined the impact of different price increases ($0.50, $1, $2, and $4)
on high school students’ smoking intentions. Higher prices, as predicted, reduced the
number of students who intended to smoke, and the actual number of cigarettes smoked.
Higher prices also increased the number of students who planned to quit smoking.
Given the robust data on the relationship between price and smoking behaviour, Ross
and Chaloupka (2003) stated that ‘the single most consistent conclusion from the
economic literature on the demand for cigarettes is that consumers react to price changes
according to economic theory principles
an increase in price leads to decrease in
consumption’ (p. 219). While we agree that an increase in price can reduce consumption,
price alone cannot explain why people start smoking, nor can it completely deter young
people from starting or continuing to smoke.
This is where psychological research can play a prominent role (see Carvajal, Hanson,
Downing, Coyle, & Pederson, 2004). For example, the economic analyses reported above
are perfectly aligned with psychological theories, such as the theory of planned behaviour.
Although Ross et al. (2005) used a quasi-experimental design, their research highlights how
6 Y. Hanoch and M. Gummerum

psychological theories can inform economists about what motivates behaviour, and also
how economic principles can motivate psychological experiments. Emery, White, and
Pierce’s (2001) work reveals further interesting trends for psychologists. Looking at the
relationship between cigarette use and price, the authors found that changes in price had
little effect on whether youth experimented with cigarettes. This suggests that other factors,
such as peer pressure, might be in play. Sussman et al.’s (2005; see also Sussman, Sun, &
Dent, 2006) cautionary note
arguing against abandonment of school-based cessation
programmes
therefore, should receive serious attention. Indeed, the youth-focused
Florida Pilot Program on Tobacco Control (Bauer, Johnson, Hopkins, & Brooks, 2000)

using multilevel approaches to fight youth smoking, none of which included price change

reported promising results: significant reduction in cigarette use and increase in intention
not to smoke. Due to lack of funds, however, the programme has largely been shut down.
Given the complex reasons underlying smoking behaviour, affecting young people all over
the world, bringing economic and psychological theories together might prove to be a very
powerful tool in lowering the number of youths who start to smoke and/or reducing the
number who already do.

Mental health and economics

The price tag for treating mental health disorders in the USA (aside from dementia and
mental retardation) in 2001 was close to $85 billion (Mark et al., 2005). Given the rise in
demand for mental health services and their costs (see, Frank, McGuire, Normand, &
Goldman, 1999) it is not surprising that economists and policy makers have shown a
growing interest in evaluating the merits of different interventions and their respective
price tags. Although more attention is being paid in general to such issues, economic
evaluation of children’s mental health service utilisation and expenditures is still relatively
scarce (Knapp, 1997). One of the main tools economists employ to study the merits of
different treatments is known as cost-effectiveness analysis. As the name suggests, an
analysis of cost-effectiveness allows researchers to compare the costs of two (or more)
competing treatments in relationship to their benefits. For example, a cost
benefit analysis
will compare the prices of two treatments in relationship to their ability to help children
with Attention Deficit Hyperactivity Disorder (Zupancic et al., 1998).
Attention Deficit Hyperactivity Disorder is one of the most prevalent behavioural
disorders among children (Richters et al., 1995). Estimates suggest that 3
11% of all US
children are afflicted with ADHD (Chan, Zhan, & Homer, 2002). Furthermore, recent
findings suggest that ADHD does not end in childhood but can continue well into
adolescence and adulthood (Okie, 2006). ADHD has attracted much attention, in part
because of its long-term negative consequences for children, which can include low
performance in school (Barkley, Anastopoulos, Guevremont, & Fletcher, 1991), higher
rates of criminal involvement and incarceration (Mannuzza, Klein, Konig, & Giampino,
1989; Satterfield & Schell, 1997), higher rates of substance abuse, and higher prevalence of
accidents (Gayton, Baily, Wagner, & Hardesty, 1986) as well as accidents with serious
bodily harm (Barkley, 2001).
The range of negative outcomes associated with ADHD and its high prevalence in the
population have led economists, health care professionals, families, and policy makers to
pay closer attention to the economic costs associated with treating the disorder. The
pharmaceutical cost of treating children with ADHD, for example, has been shown to be
almost 50% higher than treating children with asthma (Kelleher, Childs, & Harman, 2001),
another common illness among children. And research has shown that ADHD patients
 Health Psychology Review 7

tend to utilise medical services at higher rates (often more than twice) than a matched
control population (Swensen et al., 2003), and have a higher annual expenditure ($1151 vs.
$712; Chan et al., 2002; Leibson, Katusic, Barbaresi, Ransom, & O’Brien, 2001). In
addition, children with ADHD often exhibit additional comorbidities (e.g., depression)
that require additional health services and expenditures (Guevara, Lozano, Wickizer, Mell,
& Gephart, 2001).
The high cost of health care associated with ADHD has led to a number of important
questions. Will higher investment in ADHD treatment today yield long-term benefits in
terms of cost savings and better outcomes? And which treatment option (e.g., drugs,
psychological therapies, or both) is the most cost-effective?
In his review of the literature on the relationship between economics and children’s and
adolescents’ mental health, Knapp (1997) argued that
‘the most fundamental concern for families with children with health problems is that their
treatments are effective. This, too, must be the primary concern of the psychiatrist,
psychotherapist, social worker or other care professionals working with children and families.
But in neither case is it likely to be the only concern. If families are directly bearing some of the
treatment cost . . .what they pay should certainly influence what they decide to use’. (p. 8;
emphasis in the original)

That is, families are not only concerned about the health care of their children, but also
about being able to pay for their children’s treatment. While at present there is a dearth of
knowledge about the relationship between higher investment and long-term results,
relatively more data exist about the cost-effectiveness of the different treatments for
ADHD.
Economic analysis suggests that medication management is the most cost-effective
treatment option for ADHD. In what was probably the first cost-effectiveness analysis of
treatment options for ADHD
conducted for the Canadian Coordinating Office of Health
Technology Assessment
Zupancic et al. (1998) compared the costs and benefits
associated with three different pharmaceutical therapies (methylphenidate, dextroamphe-
tamine, and pemoline) as well as psychological/behavioural therapy. Results showed that
the annual cost of the cheapest drug alternative (methylphenidate) was $564; for
psychological/behavioural therapy it was $1946, and the combination therapy cost
$2510. More importantly, each therapeutic alternative was evaluated in relationship to
the cost needed to increase one point difference in the Conner Teacher Rating Scale
(CTRC) (a common measure used to assess attention-deficit/hyperactivity and related
problems in children). Again, methylphenidate, at $83 for each point difference in the
CTRC, proved to be the most cost-effective option; in comparison, the psychological/
behavioural therapy cost $6487, and the combination therapy $663 per point difference
(for a comparison of all possible alternatives, see Zupancic et al., 1998, Table 9 and Figure
6).
The most recent and comprehensive cost-effectiveness study of ADHD treatments
comes from the Multimodel Treatment Study of Children with ADHD (MTA; Jensen et
al., 2005; for an earlier analysis see Gilmore & Milne, 2001). For 14 months the MTA (for
details see Jensen et al., 2001) followed 579 children, aged 7.0
9.9, who were randomly
assigned to one of three treatments arms
medication management (typically methylphe-
nidate), intensive behavioural treatment, or a combination of the two
or to community
care (where the community care served as the control). Their results mirror those found by
Zupancic et al. (1998). First, cost per child over the 14 months of the treatment period was
$1071 for routine community care, $1180 for medication management, $6988 for the
8 Y. Hanoch and M. Gummerum

intensive behavioural treatment, and $7827 for the combined treatment. Cost-effectiveness
findings, in terms of the costs associated with bringing additional children to normal
functioning, were far more dramatic. Such costs are measured as cost-effectiveness ratios,
which in this study correspond to the amount of money needed to bring one additional
child to normal functioning by one of the three treatments (medication management,
behavioural therapy, or a combination), in comparison to treating the child through usual
care in the community where he or she would not be brought to normal functioning
(Jensen et al., 2005). For example, the cost-effectiveness ratio between medical manage-
ment and community care was $360, between behavioural therapy and community care
over $68,000, and between the combined therapy and community care $15,000. That is,
medication alone seemed to provide the most cost-effectiveness treatment alternative (for
further details, see Jensen et al, 2005, p. 1633, Table 4 and Figure 1). Interestingly, a study
by Scheffler, Hinshaw, Sepideh, and Levine (2007) found that between 1993 and 2003 there
was a 274% increase in worldwide utilisation of ADHD medications (e.g., methylpheni-
date), with a similar trend in the USA alone (which accounts for about 83% of the world
ADHD drug utilisation).
Why should psychologists be familiar with cost-effectiveness analysis techniques and
findings? As the cost of health care services rises, it is likely that cost-effectiveness
techniques and the pressure to reduce spending will influence the decision making of
insurance companies, parents, policy makers, and practitioners about what treatment
options to pursue and sponsor. Indeed, cost-effectiveness analysis is becoming more
ubiquitous, covering a larger set of diseases and interventions, and more national panels
are recommending their use in treatment decisions (Neumann, Stone, Chapman, Sandberg,
& Bell, 2000) as well as for resource allocations (Frank et al., 1999). Health maintenance
organisations (HMOs), for example, pressure practitioners to translate cost-effectiveness
findings into practice, in an attempt to save money. Furthermore (and possibly threatening
to psychologists), cost-effectiveness analysis tends to favour drug therapies rather than
psychological interventions (Patel et al., 2003) to treat mental health problems (e.g.,
depression). Recognising this trend, which has been influencing other mental health
treatments for some time (e.g., depression, Gilbody, Bower, & Whitty, 2006), health
psychologists could bring their own expertise to bear on several unanswered questions.
Psychologists, thus, should familiarise themselves with the merits of the techniques, as
well as be cognizant of their limitations and drawbacks (Neumann et al., 2000). First, it is
unclear whether ADHD represents a single or a constellation of phenomena; diagnosing
ADHD is still a challenging task; and there is little agreement about which outcomes to
measure (Stein, 2007). Second, there is a paucity of data about the long-term effects of
ADHD and the various treatments currently available. That is, to our knowledge, no
longitudinal study has examined the effects of treatment alternatives (drug management vs.
behavioural therapy) on rates of accidents, work loss, or criminal behaviour. Yet these three
domains
accidents, work loss, and criminal activity
can carry heavy monetary costs as
well (see Matza, Paramore, & Prasad, 2005). Third, long-term effects of ADHD
medication management are still not completely clear, and it might turn out (as in the
case of pemoline, a drug that has been used to treat ADHD but has proven to have serious
side effects) that the risks associated with some of the currently used drugs outweigh their
benefits (as well as their cost-effectiveness). Some children do not respond well (or at all) to
medication. Thus, despite its greater cost, it might be premature to abandon behavioural
therapy as a means for treating ADHD, as medication is still far from being a panacea for
the disorder. Finally, the decision as to what constitutes the best policy (about ADHD or
other mental health issues) is not always contingent on cost alone. It may be determined by
 Health Psychology Review 9

a range of other issues of importance to policy makers. For example, policy makers might
decide to adopt a more expensive alternative (medication and psychological intervention)
that is better aligned with their (or their constituents’) values, or because that policy helps
reduce inequality.

Economics, public programmes, and older adults’ health

In the previous two sections we illustrated how economists and psychologists approach
health concerns
such as smoking and ADHD
by employing different sets of tools and
methodologies. In our next section we would like to concentrate on a domain that has been
almost exclusively dominated by economists: the design of national health programmes.
We will use the new Medicare drug benefit as an illustrative case, although other national
programmes
such as Medicare parts A and B and Medicaid
have also been largely
designed by economists. We believe that this domain might offer a great opportunity for
psychologists to share insights with policy makers and should encourage a greater
emphasis on the relationship between institutional design and health. Despite the impact
of various public policies on health (from allocation of scarce resources to promotion of
health behaviours), psychologists have contributed relatively little to their design. Given
the large scope of this topic, we are only able to touch briefly on the relationship between
policy design and health.
We focus our discussion, therefore, on the new Medicare Modernization Act (also
known as Part D), which came into effect in January 2006. The 2003 legislation, according
to the Centers for Medicare and Medicaid Services, ‘provides seniors and individuals with
disabilities with a prescription drug benefit, more choices, and better benefits under
Medicare’ (see http://www.cms.hhs.gov/MMAUpdate/). The Medicare Modernization Act
(MMA) represents one of the biggest health policy changes to have taken place since the
birth of Medicare and Medicaid in the mid-1960s. However, from its inception Medicare
Part D has drawn much criticism. While some of it is irrelevant for our current discussion,
two points in particular do concern us: (i) the large number of plans that are available to
beneficiaries (Hanoch & Rice, 2006), and (ii) the amount of information and presentation
format that have been used to educate consumers.
We believe that psychologists could have played a more prominent role in the design of
the programme, contributing their extensive knowledge of older adults’ decision-making
styles and cognitive abilities. They could have also formed closer ties with policy makers, as
some of the concerns about the programme are psychological by nature rather than
economical. It is possible that more active involvement of psychologists could have averted
some of the problems with the design of the programme.
Given the evidence on older adults’ cognitive and decision-making capacities, one
might wonder about the rationale behind the design of the Medicare programme. Not only
must older adults face extremely complex information, they need to do so in an
environment that contains over 50 different plans. The current design of Medicare Part
D can be attributed, in part, to economists’ belief that having more choices is better than
having fewer. A number of assumptions are implicit in the idea that more choices are useful
rather than harmful to individuals. First, people possess enough information about the
alternatives available to them; second, they have the cognitive ability to evaluate the
various options available and to choose the one that will maximise their utility; third,
consumers will not regret the options not chosen; fourth, they do not think (too much)
about what other individuals possess; and, finally, market competition does not lead to
excessive waste. Following the dictates of rational choice theory, the US health care system
10 Y. Hanoch and M. Gummerum

has always championed choice, as is apparent in the plenitude of health insurers, hospitals,
and specialists. The design of the Medicare drug benefit can be seen as a natural extension
of this line of thought. The legislative branch, after all, could have designed the programme
in many different ways. However, it decided to adhere to traditional economic thinking:
letting many firms compete in the market.
Psychologists have long been aware of, and interested in, people’s cognitive limitations.
Starting with the pioneering work of Herbert Simon (1947, 1955) in the late 1940s, the idea
that people are boundedly rational has been largely supported by a range of experiments
and findings (for a review, see Conlisk, 1996; Kahneman, 2003; Rabin, 1998). Simon’s
notion of bounded rationality was born as a reaction to rational choice theory
one of the
pillars of economic theory. Rational choice theory, Simon argued, ignores how real people
behave and make decisions.
One area that has garnered much attention has been the relationship between old age
and executive functioning. That is, while young people show some cognitive limitations,
these cognitive abilities tend to decline even further with age. A growing corpus of data, for
example, has shown an inverse relationship between age and decision-making abilities (for
a review, see Thornton & Dumke, 2005). Older adults face other obstacles in making
health-related decisions. Many have low reading or mathematical abilities. These skills,
however, are necessary to fully comprehend the intricacies of insurance plans or treatment
options (Hibbard, Jewett, Engelmann, & Tusler, 1998). A study by Finucane et al. (2002),
for example, examined older and younger adults’ decision-making capacities by measuring
their comprehension of health plan information. Older adults’ scores (compared to those
of younger adults) were much lower on a number of tasks that required the use of tables or
graphs.
While thinking about the merits of having a wide range of choices (e.g., it leads to
market efficiency), economists, for the most part, have failed to consider the psychological
price that choice might carry (see Schwartz, 2004). Indeed, policy makers have neglected,
for the most part, to investigate what Medicare beneficiaries think about its intended
structure. Would they prefer to encounter more or less choice? And more importantly, does
more choice hamper older adults’ ability to make decisions? Economists might be
surprised by the answers, as recent psychological studies have shown that more choice does
not necessarily translates into better decisions and can, in fact, lead to worse decisions
(Iyengar & Lepper, 2000).
That most seniors think the new Medicare drug benefit is too complicated would not
surprise many psychologists. Had they been consulted at an early stage of the programme’s
development, psychologists would have been in the position to alert policy makers to the
possible obstacles that older adults might encounter in facing such a complex programme.
In addition, psychologists could have suggested decision-making aids to help older adults
better understand the nature of the programme, as well as contributed to the development
of the various websites that exist to help beneficiaries make informed decisions.

Health economics, health psychology, and policy making

Our discussion thus far raises a number of questions. First, how do psychology and
economics differ? Second, what can health psychologists adopt from health economics?
Third, why does health psychology play a marginal role in policy making? And fourth, how
can economists and psychologists contribute more to policy making? These are important
questions, and the answers are interrelated. In the next sections we aim to provide at least
 Health Psychology Review 11

partial answers; given space limitations we cannot fully address these questions, as each
might require a paper on its own.

Health economics, health psychology, and policy implications

The examples above represent only a sample of potentially relevant research. What they
highlight, however, is that policy makers seem to be more attuned to the findings of health
economics than of health psychology. What can psychologists do to increase their visibility
among policy makers? This is, for a number of reasons, not a trivial question. How policy
makers adopt scientific findings to make informed decisions and policies has not been
empirically tested. Second, policy makers base their decisions on a range of factors
these
can be economic, social, ethical
to support their agendas. That is, policy making is often
driven by lobbying and pressure from interest groups, and not from state-of-the-art
scientific evidence. In the domain of children’s well-being, for example, Shonkoff (2000)
argues that ‘in the world of social policy, science competes with values and ‘‘common
sense’’, and decisions are made through a process of negotiation and compromising
competing interests’ (p. 181). Finally, one might wonder why economists have had more
influence on policy making than psychologists.
One way to influence policy makers is simply to inform them about scientific findings
and their potential relevance to health policies. One common way to disseminate scientific
knowledge is via scientific journals; hence we decided to examine the number of journals in
economics and psychology that are targeted towards policy makers. Searching through the
ISI Web of Knowledge, we found that out of 175 economic journals, 12 had the term policy
or political in their title. We next turned to the domain of health policy and services. Out of
39 listed journals, the majority publish articles related to economics and/or medicine, with
only one journal representing psychology (Psychology, Public Policy, and Law). Despite the
large number of psychology journals
over 400 listed in the database
we found only one
additional policy-related journal (Political Psychology; but see also Journal of Social
Issues). While it is difficult to determine whether having the term policy or political in a
journal title allows for better transmission of information to policy makers, it highlights
economists and health service researchers’ (many of whom are health economists) belief
about the necessity to communicate their work to policy makers. A valuable step would be
for psychologists to follow economists and health service researchers’ example, and create
a forum that relates their work to policy makers.
Health economists often focus on changes and interventions on the macro, or
population, level. This might serve as another explanation of why they are able to
influence policy makers. By looking at the macro level, and analysing large data sets (often
with thousands or even millions of data points), health economists are able to draw broad
(and what might be conceived by policy makers as more accurate) conclusions. It is
possible, therefore, that health economists’ edge among policy makers is driven by their
ability to provide data from, and about, large populations. For example, by analysing data
from more than six million patient-discharge records, Needleman, Buerhaus, Mattke,
Stewart, and Zelevinsky (2002) were able to show that as the number of registered nurses in
hospitals declined, the length of time patients spent in the hospital and their likelihood of
suffering complications increased. Based on this study, congress was able to pass the Nurse
Reinvestment Act. Finally, psychological research has long been interested in the
shortcoming of human cognitive abilities, among lay person and experts alike. It is
possible that this emphasis might have also reduced policy makers’ motivation to work and
collaborate with psychologists.
12 Y. Hanoch and M. Gummerum

There are clear trade-offs between looking at populations and looking at individuals.
One of the main disadvantages of using population-based data or drawing from existing
data sets is the lack of experimental rigor, or internal validity, which makes it difficult to
draw causal conclusions. In contrast, psychologists usually design experiments that focus
on an individual level, which improves internal validity and makes it possible to test
(causal) influences between variables, but they tend to pay less attention to the external
validity of the experiment. As Green and Glasgow (2006; Glasgow, Green, & Ammerman,
2007) have pointed out, practitioners, programme planners, and, potentially, politicians
tend to trust and take up the results and recommendations of scientific studies if those
studies reflect the local realities, populations, and circumstances. Thus, the tendency in
psychology to examine small and homogeneous samples in controlled experimental
settings might render psychological results less applicable to large and heterogeneous
populations and thus less attractive to policy planners.
Another reason why economics plays a more central role among policy makers is its
ability to deliver monetary information. Whether one is interested in preventing child
injuries, increasing the number of nurses in hospitals, or reducing smoking prevalence,
money is a vital (and unifying) component. That is, economists not only are able to show
that changing child-restraint practices in cars can save lives or that increasing the number
of nurses can aid patients, but they can do so while providing information about the
financial costs and benefits of these programmes. In other words, economists deliver ideas
on how policies might affect behaviour, how much they will cost, as well as whether they
will help save money. Economists are, thus, central for policy making because of, as a
reviewer correctly pointed out, scarcity of resources. That is, policy makers must make
trade-offs between programmes, adopt one policy over another, or invest in one health
domain but not another. For example, it was the economic evaluation (Finkelstein,
Fiebelkorn, & Wang, 2003) of the price tag of obesity
over $90 billion in medical
expenditures each year
coupled with the economic finding (Strum, 2002) that obesity has
a broader and more extensive effect on a range of chronic conditions than smoking or
drinking, that has raised obesity to the top of the list of health care priorities and led
policymakers to appropriate funds to battle the phenomenon.

Economics and psychology: from methodological differences to fruitful collaborations

Economics and psychology merge and diverge in a number of places. First, and most
importantly, both fields are interested in understanding, explaining, and predicting human
behaviour. As we mentioned earlier, they investigate similar problems (e.g., smoking) and
share similar goals (e.g., increasing healthy behaviour).
While economists and psychologists might share certain commonalities, they differ in a
number of important ways. Economists have long been interested in improving market
efficiency, especially from a financial perspective. They have been, for the most part, less
concerned with how psychological factors (such as cognitive capacity or emotions) affect
behaviour. Psychologists, on the other hand, have traditionally focused on the individual
(the micro level) and have paid far less attention to the macro or population level. That is,
while psychologists have been interested in how mental states (e.g., cognition, emotions,
etc.) affect individual behaviour, they have been much less concerned (if at all) with market
efficiency. Furthermore, psychologists tend to run controlled experiments, which often
have a small and convenient sample. Health economists, on the other hand, typically
analyse populations (or large data sets) to capture and study health-related trends.1 Thus,
while economists and psychologists have been interested in similar problems, the fields
 Health Psychology Review 13

have tended to rely on different theories to explain them, to employ different

methodologies to study them, and to utilise different means to modify them. These
differences, we suggest, could complement one another. Psychologists can provide more
psychologically plausible models of individual human behaviour and decision making,
while economists can better capture and analyse global trends.
To see how economic and psychological thinking and practice might differ (while
addressing the same problem), we use the example of organ donation. Although the
majority of Americans approve of organ donation, only 28% have actually signed a donor
card. Indeed, there is a serious shortage of organs, and thousands of people die each year
as a result. What can be done to alleviate the problem?
Economists might approach this issue as a supply and demand problem and look for
ways to improve market efficiency. When not enough donors exist in the market, the
second best thing is to improve the way the market operates. One interesting case is kidney
donation, which can be performed while one is still alive. Many individuals who need a
kidney transplant cannot find a compatible one from a relative. Their chances are better if
they can extend the search to non-related individuals. Indeed, in 2003 about one third of all
kidney donations came from live, non-related individuals (Saidman, Roth, Sönmez, Ünver,
& Delmonico, 2006). One way to increase the number of compatible donations would be to
create a system of matching non-related donors and recipients (Delmonico, 2004).
Economists have found ways to improve market efficiency by designing ‘a clearinghouse
that can identify efficient sets of feasible exchanges among incompatible patient donor
pairs’ (Roth, Sönmez, & Ünver, 2007, p. 829).
Designing better and more efficient markets is one strategy to increase transplant rates.
A second approach could increase the number of people who are willing to become an
organ donor. This is where psychology has much to contribute. Johnson and Goldstein’s
(2003) work exemplifies precisely the thinking advocated in this paper. Looking at
European donation data, Johnson and Goldstein discovered an interesting trend. In
European countries there are two different organ donation policies. In France, Poland, and
Portugal, for example, people are organ donors unless they register not to be one. In
Denmark, Germany, and the UK, on the other hand, people are organ donors only if they
register to become one. That is, the key difference between these countries is whether one
has to opt-out or opt-in to become an organ donor. Does this difference translate into
different numbers of registered donors? In France, Poland, and Portugal the rates of people
who are registered as donors are all over 95%, while in Denmark, Germany, and the UK
they are below 20%.
Looking at this data, Johnson and Goldstein (2003) suggested that defaults could save
lives.2 In a series of three studies, they showed that an individual decision to become a
donor could be almost doubled (from 42 to 82%) simply by changing whether a person
needed to opt-in to or opt-out of an organ donation programme. By understanding the
psychological factors that affect an individual decision, and running controlled studies,
Johnson and Goldstein were able to illustrate how psychological work can have clear and
direct policy implications. The case of organ donation captures a number of our ideas. It
demonstrates how the two disciplines’ theories and methodologies shape their thinking and
experimental design, the problems they try to solve, and, as a consequence, the policy
recommendations that are derived. Furthermore, it also shows the complementary nature
of the two fields, and the benefits of working together.
Despite the fields’ differences, economists and psychologists have been collaborating in
a number of areas, and a range of psychological research findings could (and should)
influence economists. Two areas where psychologists and economists (and neuroscientists)
14 Y. Hanoch and M. Gummerum

have been collaborating are in the field of behavioural economics (see Wilkinson, 2008)
and in neuroeconomics (for a review, see Leowenstein, Rick, & Cohen, 2008). Examples of
these collaborations include studies on time discounting and health-related decision
making (Chapman & Weber, 2006; Frederick, Leowenstein, O’donoghue, 2002), and the
role of emotion (e.g., anticipated regret; Looms & Sugden, 1982) in relationship to health
decisions. Studies along these lines have shown that anticipated regret could moderate risky
sexual activity (Richard, van Der Plight, & de Vries, 1996), or increase vaccination rates
(Chapman & Coups, 2006). Many of these collaborations, however, have tended to focus
on judgment and decision making (e.g., decision making under uncertainty, social decision
making) and on the individual level rather than the macro level. One possible, and
important, exception is research on quality of life, a domain that has received much
attention from economists (Hirth, Chernew, Miller, Fendrick, & Weissert, 2000), health
care professionals (Testa & Simonson, 1996) and psychologists (Diener & Suh, 1997).
One area, as we indicated above, where psychological work has infiltrated economic
thinking is in medical decision making. A range of psychological studies
relying on both
economic tools and psychological knowledge
illustrate psychology’s potential to
influence economic thinking and policy makers. They also demonstrate how psychologists
can implement economic thinking in their field. For example, the work of Brownell and his
colleagues (Hogan & Brownell, 2002; Yach, Stuckler, & Brownell, 2006) nicely illustrates
how psychologists can use economic theory to fight obesity and diabetes
mainly through
understanding the relationship between price change and consumption of healthy food.
Analysing trends of food consumption, Yach et al. concluded that
‘at the broadest level, the roadmap [to fight obesity and diabetics] could begin with economic,
political, social, psychological and biological factors. At the narrowest level, it might begin
with the most proximal factors that affect eating and activity. In the case of eating, these would
be taste, accessibility, convenience, cost and amount of promotion’. (p. 65)

In an earlier study, Hogan and Brownell (2002) examined the effect of price, health
messages, and their combination on participants’ willingness to order healthy food in a
restaurant. To the authors’ surprise, price decrease alone (rather than a combination of
price decrease and a health message) was the best predictor of healthy food ordering. This
suggests, the authors argued, that price decrease may be more effective than health
messages (findings that are perfectly aligned with the law of demand in economics). It may
also suggest that health messages could undermine the effect of price reduction. Because of
the dearth of similar studies, it is difficult to tell whether Hogan and Brownell’s findings are
unique to the food domain or whether they can be generalised to other health areas (e.g.,
smoking). At the same time, their study clearly illustrates the importance of being familiar
with economic theories as well as the need to mesh economic factors (such as pricing) with
psychological ones (such as health messages).
While economists have clearly contributed to our understanding of the obesity
phenomenon, reducing the rates of obesity is still a health priority. As the work of
Brownell and his colleagues’ shows, economists and psychologists can form meaningful
collaborations to better understand and tackle health problems. Their work also illustrates
how psychological research can inform policy makers. Indeed, psychologists have long
been investigating a range of health-related areas
improving communication between
health care professionals and patients, formulating health information for consumers,
elucidating patients’ decision-making process, improving decision aids for consumers
that
should have afforded them with a much larger role in shaping health policies. In fact, given
 Health Psychology Review 15

psychologists’ knowledge of human behaviour, it is somewhat surprising to see their

relatively negligible influence in this domain.

Conclusion
Ariely and Norton (2007) suggested that despite commonalities between economists and
(social) psychologists, methodological issues have kept the two fields apart. They argued
that ‘the lack of communication between psychology and economics is particularly
unfortunate because the fields share interest in similar topics that are of clear importance
to public policy and social welfare’ (p. 338). We wholeheartedly endorse their belief and
hope that this paper will foster further dialogues between health economists and health
psychologists. In fact, we believe that the health domain represents one of the best
examples where psychologists and economists share interests and goals with clear and
direct implications for people’s well-being.
While we support Ariely and Norton’s ideas, forming interdisciplinary collaborations
must overcome a number of barriers, such as reliance on distinct models and theories,
employment of specific methodologies, and the proposal of specific solutions. As we have
argued throughout the paper, however, the complexity of health care problems
ranging
from youth smoking, treatment of ADHD, and solving the lack of organ donation
might
require a multidisciplinary effort. Indeed, as neither economists nor psychologists hold the
panacea that will solve the complex and myriad problems that prevail within the health
care system, a joint effort might prove to be more fruitful than either working alone. While
increasing cigarette prices does reduce smoking prevalence, and determining cost-
effectiveness does help reveal the merits of different treatment options, neither approach
is sufficient to solve the problem. At the same time, it would be wise for health
psychologists to familiarise themselves with the tools of the trade economists have been
using, and adopt the ones they see fit, if they are interested in ever influencing policy
makers and helping to design health-related institutions.
Finally, the ideas developed in this paper are not meant to be exhaustive, and there are
other means and methods that psychologists could take to influence policy makers. We do
follow Shonkoff’s (2000) ideas and argue that (health) psychologists’ main role is in
providing scientific data and evidence to policy makers. The American Psychological
Association (APA) and the Missouri Psychological Association submission of an amicus
curia to the US Supreme Court deliberation on adolescents’ decision-making abilities
within the criminal justice system could serve as a good example. Psychological
organisations, such as the APA, should establish channels that facilitate transmission of
state-of-the-art psychological evidence and information to policy makers, encourage their
(present and future) members to think about the link between psychological evidence and
policy making, and foster programmes that bring psychologists and policy makers
together.

Acknowledgements
We would like to thank Thomas Rice for helpful comments on an earlier draft, Richard Scheffler for
valuable discussion on the economics of ADHD, three anonymous reviewers for helpful comments,
and Anita Todd for editing the manuscript.
16 Y. Hanoch and M. Gummerum

Notes
1. One notable exception is the RAND health insurance experiment. According to the official
RAND website, ‘The HIE [health insurance experiment] project was started in 1971 and funded
by the Department of Health, Education, and Welfare (now the Department of Health and
Human Services). It was a 15-year, multimillion-dollar effort that to this day remains the largest
health policy study in US history’ (see http://www.rand.org/health/projects/hie/).
2. Economists (Benartzi & Thaler, 2001) have used similar techniques to increase contributions to
401(k) plans. They have also argued that changing policies from opt-in to opt-out can promote
happiness and health (Thaler & Sunstein, 2008).

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