In the debates over how to reform U.S. health care, one statistic stands out: More than half of every dollar spent on it is wasted, according to an April 2008 report by PricewaterhouseCoopers. Much of that waste is because doctors and patients are often not cost-efficient.
Express Scripts (ESRX), a St. Louis pharmacy benefit manager that handles drug coverage for large employers and health plans, is out to change that behavior. The company, which earned $780 million last year on $22 billion in sales, is applying the principles of behavioral economics to reduce waste, improve patient health, and boost its bottom line. Express, which is No. 22 on this year's BusinessWeek 50 ranking of top performers in the Standard & Poor's 500-stock index, is tapping economic research to persuade customers to adopt money-saving practices.
One example: More than 70 Express clients, including uniform supplier Cintas (CTAS), have signed up for an initiative that focuses on getting employees to order drugs for chronic conditions, such as high blood pressure, through the mail. Home delivery is more efficient and thus a higher-margin business for Express than managing prescriptions filled at drug stores. That's because mail-order prescriptions get processed through its highly-automated pharmacies and come in 90-day packs instead of the usual 30-day supply. At the beginning of a three-month program that Express piloted with Lowe's (LOW), only 14% of the home improvement retailer's employees on so-called maintenance medications received their drugs by mail. When the pilot ended in March, 38% did.
Express and rivals such as Medco (MHS) typically try to persuade patients to switch by making mail-order drugs cheaper than store-bought ones. (Some employers require mail order for certain medications.) But incentives don't always work. The reason, says Express Chief Scientist Bob Nease, is a phenomenon known as "present bias," one of the principles of behavioral economics, which stresses that humans often act irrationally. People are more inclined to focus on the immediate hassle of changing a habit than the future benefit. So faced with the paperwork to initiate home delivery, most will keep driving to a pharmacy.
Express attacked such inertia by forcing Lowe's employees to make a conscious choice. The company contacted employees with letters and phone calls, asking them to choose between mail and retail. If employees didn't make a decision by their third refill, their drug costs would not be covered until they decided. That forced customers to weigh their options.
Through its year-old Center for Cost-Effective Consumerism, Express is testing new approaches to changing behavior. The goal is to put the theories of such economists as Harvard University's David Laibson to work. "I was concerned it was window dressing, but they were truly interested in putting these ideas into practice," says Laibson, a paid member of the center's advisory board who has also studied how companies can increase 401(k) plan enrollment. On May 27, Express co-hosted a Washington symposium on the use of behavioral economics in health care, which drew 200 people—far more than the company had anticipated.
Another theory Express is using is "loss aversion," which says people work harder to avoid losses than to pursue gains. That has led it to change its marketing pitch in other programs from "save money" to "stop wasting money".
While it's too early to quantify the cost savings from its fledgling research, Jefferies analyst Art Henderson believes it is already becoming a competitive advantage for Express. "It's pretty powerful stuff," he says.