627. Sludge, Part 1: The World Is Drowning in It

Summary

Freakonomics Radio - Episode 627: Sludge, Part 1: The World Is Drowning in It

In Episode 627 of Freakonomics Radio, co-author Stephen J. Dubner delves into the pervasive and often invisible force known as "sludge." This term, introduced by Nobel laureate Richard Thaler, encapsulates the myriad ways in which systems and processes are deliberately or inadvertently designed to hinder rather than help individuals navigate daily tasks. The episode explores the origins, manifestations, and profound impacts of sludge, particularly within the healthcare industry and subscription services.

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Introduction to Sludge

Stephen Dubner opens the episode with a relatable frustration: renewing a driver's license. He recounts his experience with the Department of Motor Vehicles (DMV) and the American Automobile Association (AAA), highlighting how what was supposed to be a streamlined process turned into a time-consuming ordeal. This anecdote sets the stage for the exploration of sludge—a term that represents the obstacles embedded in various systems that complicate simple tasks.

“Has this sort of thing ever happened to you? Of course it has. It happens all the time.”
— Stephen Dubner [04:11]

Definition and Origin of Sludge

The concept of sludge is introduced and defined by Richard Thaler, a prominent behavioral economist and co-author of the influential book Nudge. Thaler explains sludge as the antithesis of a nudge—where a nudge makes processes easier and encourages better decision-making, sludge imposes barriers that complicate actions, often leading to frustration and inefficiency.

“When something is made easier to do that is called a nudge. When it's made harder, that is sludge. It's no coincidence that these words rhyme.”
— Stephen Dubner [06:04], Richard Thaler [06:22]

Thaler emphasizes that sludge can arise from various factors, including bureaucracy, lack of foresight, or even strategic maneuvers by organizations aiming to maximize profits by discouraging certain behaviors.

Sludge in Healthcare

A significant portion of the episode focuses on sludge within the U.S. healthcare system, featuring insights from economist Ben Handel and psychologist Neil Mahoney. Handel explains how sludge manifests in healthcare through convoluted processes like finding in-network doctors, dealing with insurance claims, and administrative burdens placed on physicians.

“Most other markets are designed to help you make your purchase as easily and quickly as possible. It's almost seamless. Sometimes you don't even know you're buying stuff... With healthcare, it's the exact opposite.”
— Ben Handel [14:16]

Mahoney adds that this sludge leads to higher costs and suboptimal health outcomes. The U.S. healthcare system's complexity, driven by private insurers and fragmented providers, exacerbates the problem. Administrative tasks consume vast amounts of time and resources, contributing to inefficiencies and dissatisfaction among both consumers and healthcare professionals.

“94% of physicians say these administrative issues are a huge burden. 64% say they've experienced burnout in part because of these administrative frictions.”
— Neil Mahoney [36:47]

Sludge in Subscription Services

The discussion transitions to sludge in the realm of subscription services. Subscribers often find it deceptively easy to sign up for services but frustratingly difficult to cancel them. Handel presents research indicating that forced decision points—such as updating credit card information—significantly increase cancellation rates. This suggests that when consumers are prompted to make active choices, they are more likely to opt out of unwanted subscriptions.

“We see 2% of people on average canceling per month in a steady state. And then during the months of expiration, suddenly four times as many people are canceling their product.”
— Ben Handel [46:54]

Examples include streaming services, news outlets, and other recurring subscriptions where hidden fees and complicated cancellation processes trap consumers into continued payments.

Economic Impact of Sludge

Handel and Dubner explore the broader economic implications of sludge. They discuss how sludge contributes to excessive spending on unnecessary services and reduces overall economic efficiency. The Council of Economic Advisors estimates that sludge-related "junk fees" cost American households approximately $650 each, totaling around $90 billion nationally.

“Consumers are spending 200% more money than they would. That's for some products, the ones where it's easy to forget about them.”
— Ben Handel [48:19]

Furthermore, sludge disproportionately affects the less affluent, as those without the resources to navigate complex systems or pay for sludge-processing services are left at a significant disadvantage.

Guest Insights and Research Findings

Richard Thaler, Ben Handel, and Neil Mahoney provide expert perspectives on the origins and perpetuation of sludge. Thaler discusses how both intentional and inadvertent factors contribute to sludge, while Handel shares his research on insurance choices and dominated options that cost consumers financially.

“There is strong evidence that people do not translate readily available information into knowledge that would help them make better decisions.”
— Ben Handel [30:53]

The guests also highlight how sludge not only burdens consumers but also strains professionals within industries, such as healthcare providers facing administrative overload leading to burnout and the consolidation of small practices into larger corporations.

Conclusion and Upcoming Topics

As the episode draws to a close, Dubner underscores the pervasive nature of sludge across various sectors and hints at exploring potential solutions in the upcoming Part 2 of the series. The discussion emphasizes the need for systemic changes and policy interventions to mitigate the adverse effects of sludge, promoting a more efficient and equitable society.

“Sludge is everywhere and it's time to fight back.”
— Stephen Dubner [05:16]

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Key Takeaways

• Sludge Defined: Complex processes that hinder rather than help individuals in making decisions or completing tasks.
• Healthcare Impact: Sludge in healthcare leads to higher costs, inefficiencies, and professional burnout.
• Subscription Traps: Difficulties in canceling subscriptions result in unintended spending and financial strain on consumers.
• Economic Costs: Sludge contributes to significant economic waste, estimated at billions annually.
• Behavioral Insights: Active decision points, like renewing credit cards, can effectively reduce sludge by prompting consumer action.

Notable Quotes

• “When something is made easier to do that is called a nudge. When it's made harder, that is sludge.” — Richard Thaler [06:04]
• “Consumers are spending 200% more money then they would.” — Ben Handel [48:19]
• “Sludge favors the powerful, the wealthy, and the healthy.” — Stephen Dubner [28:48]

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This episode illuminates how sludge operates subtly yet powerfully across different facets of life, from healthcare to everyday subscriptions. By unpacking its origins and consequences, Freakonomics Radio encourages listeners to recognize and challenge the hidden barriers that impede their daily lives.

Transcript

[Stephen Dubner]

Freakonomics Radio is sponsored by Audi it's not every day you get excited by a new car, but the all new Audi Q6E Tron is more than a new EV. It's a new way to experience driving. Embrace the thrill of the drive with effortless power, serious acceleration, and the most advanced tech of any Audi ever. With an all new panoramic digital stage and legendary Audi performance, it's impossible not to love the all new Audi Q6E Tron. Learn more at audiusa.com Freakonomics Radio is sponsored by Capital One Banking with Capital One helps you keep more money in your wallet with no fees or minimums on checking accounts and no overdraft fees. Just ask the Capital One bank guy. It's pretty much all he talks about in a good way. He'd also tell you that this podcast is his favorite podcast. Thanks Capital One Bank Guy. What's in your wallet? Terms apply. See CapitalOne.com Bank Capital One NA Member FDIC I have a story to tell you and I'm curious if anything like this has ever happened to you. I recently got a letter from the Department of Motor Vehicles saying it's time to renew my driver's license. This is a letter that no one looks forward to receiving. In many places, the DMV is famously hard to deal with long lines, confusing protocols, etc. Etc. But as I read the letter, I see there is a loophole that if you are a member of aaa, the American Automobile association, which I happen to be, then you can renew your license at their office and even better, you can set up an appointment ahead of time. That was exciting. So I made my appointment online, put it in my calendar, got all my documents together, and I showed up on the right day, the right time, and found, to my surprise, a long line of people waiting for what looked to be just two or three clerks. I asked a couple people online what time their appointments were for and they said they didn't have appointments. They had just walked in. And so I being an optimist, I thought maybe there's a separate line for appointments. So I asked around and one helpful AAA employee told me that no, the line is. The line is how he put it. And how long do you think that line will take? I asked. Oh, probably just two hours, maybe three, he said. I had pictured myself buzzing in with my appointment being done in 15 minutes, maybe 30. Even an hour would have been okay, but two hours or three, that I could not swing. So the next time you hear about a guy being arrested for driving with an expired license. That will be me. What happened at AAA surprised me. Especially because after I'd made my appointment, I received a couple emails confirming it and asking me to let them know if I'd be late. So I really thought I had an appointment the way the word is commonly used. But I realize now that their definition and mine were not the same. Either that or I had simply run into a situation where a seemingly simple thing is made complicated or slow or frustrating. Has this sort of thing ever happened to you? Of course it has. It happens all the time. And it comes in many flavors. For instance, when it takes 30 seconds to sign up for some subscription service and then forever to cancel it. Or when you fill out some massive government form online, but that one data field won't accept your answer. And when you try to hit submit, the whole thing freezes. Or when your insurance company sends you a menu of healthcare plans and you literally cannot understand the difference between the options or how much they will actually cost. There is a word for this kind of thing.

[Richard Thaler]

This is my example of sludge.

[Ben Handel]

Sludge. Sludge.

[Stephen Dubner]

Sludge, Sludge.

[Neil Mahoney]

The sludge was impenetrable.

[Stephen Dubner]

When something is made easier to do that is called a nudge. When it's made harder, that is sludge. It's no coincidence that these words rhyme. As we will hear later, they come from the same person. But where does sludge come from? Is it the inevitable residue of bureaucracy? Does it come from a lack of effort? Or maybe sheer incompetence? Is sludge ever a strategic maneuver? Today on Freakonomics Radio, we will try to answer all those questions as we begin a two part series on sludge. Did we really need two episodes for this? We did. Because sludge is everywhere and it's time to fight back.

[Neil Mahoney]

This is Freakonomics Radio, the podcast that.

[Ben Handel]

Explores the hidden side of everything with.

[Neil Mahoney]

Your host, Stephen Dubner.

[Stephen Dubner]

Here's a voice you may recognize. He's been on the show a few times.

[Richard Thaler]

If you make things harder, I call that sludge. Kind of a fun word for stuff that's the opposite of fun.

[Stephen Dubner]

Name please.

[Richard Thaler]

Richard Thaler. I'm a professor at the Booth School of Business at the University of Chicago.

[Stephen Dubner]

And you co wrote a book years ago, a beloved book really, called Nudge.

[Richard Thaler]

Correct.

[Stephen Dubner]

For anyone who's had the ill fortune to have not read Nudge, how would you describe it?

[Richard Thaler]

It's a book about how to make life better through what we call choice architecture, which means arranging the environment in which we make decisions to make it easier to navigate A nudge in that.

[Stephen Dubner]

Context is what exactly?

[Richard Thaler]

Nudge makes things easy, right? It's the WD40 of life. So sludge is the opposite. Sludge literally is gunk.

[Stephen Dubner]

As for the word itself, the way we're talking about it today, who pioneered the use of the word sludge in this context? Are you laying claim to having invented that?

[Richard Thaler]

I certainly think I did. Apparently there are others who have also made that claim, but they haven't written a book that rhymes with it.

[Stephen Dubner]

Let me intrude here for just a second to say that Thaler, compared to his fellow academic economists, is a bit unusual. He is plenty smart. He has a Nobel Prize, for instance. But he also engages with the real world in a way that many academics don't. Even in very serious matters, he manages to bring the fun. Some years back, I spent one of the most enjoyable afternoons of my life with Thaler. We both happened to be in London for work, and he had been asked to visit a few cabinet ministers to discuss how they might employ nudge strategies. So he suggested I come along, and as we went from ministry to ministry, he'd say, hey, you're getting two for the price of one today. Nudge and freakonomics. And he proceeded to dispense nudgey advice about tax forms and how to get more people to insulate their attics, all of which left the ministers pleased and enthused. Failure has a can do spirit, and this applies even to the challenge of eradicating sludge. So I asked him to start by giving a general description of the problem and whether most sludge is intentional, accidental, avoidable, or what.

[Richard Thaler]

Let's start with a category that I'll call inadvertent and or incompetent. Sludge. It comes because somebody didn't think about it. My favorite example of that is due to a guy called Don Norman.

[Stephen Dubner]

Don Norman is a design scholar who is willing to point out bad design, including what are now called, in his honor, Norman doors.

[Richard Thaler]

There are doors that have handles that are called pulls from that name. You know just what they look like, right? They're tall and often chrome or something. Given the name, you know what that thing is designed to do?

[Stephen Dubner]

Not be pushed.

[Richard Thaler]

You're saying not be pushed, right? And no matter what is written on that door, your brain just wants to pull it. There are some architects who I think should go to a special place in hell where every door is designed in order to get you to do the wrong thing. Let's clarify what we want to say about these. It's not that somebody designed them to make fools of people. This was just incompetence. You just didn't think that if you put a pole on a door that needs to be pushed, you're really making life harder than it need be.

[Stephen Dubner]

Okay, so that's an example of physical sludge. Give me a nice example of a more virtual or representative sludge.

[Richard Thaler]

A simple example is what I call the unsubscribe trap, where with one click you can sign up for some service or subscription, but then to unsubscribe they make you jump through hoops, you have to call, you have to wait, and then they try to sell you something that's sludge.

[Stephen Dubner]

In cases like that, how intentional and or strategic is it? Is that the firm making it harder to in this case cancel? Because canceling means less money and they're trying to profit maximize by essentially not letting you cancel. Is that what it's about? Or is it more incompetence or is it something else?

[Richard Thaler]

I think that one is clearly intentional. They know it's inconvenient because they are consumers also of other services. There are stories of gyms during COVID that would make their members come to the gym to quit the gym that they're not allowed to go to. Nobody's designing that innocently. There are some big subscription based companies that I've personally tried to convince to stop doing this and somebody has told me no, that would cost us too much money.

[Stephen Dubner]

Are there any good estimates of sludge as a share of GDP or the overall cost of sludge?

[Richard Thaler]

No, not that I've seen. And part of the problem is so much of it is time. But I mean, if we think about the US medical system, the sludge has to be in the hundreds of billions of dollars per year.

[Stephen Dubner]

When we started working on these episodes, we asked listeners to send in examples of sludge in their lives. And a lot of them did have to do with medical sludge. Here are a few of them. So my wife got the RSV vaccine for pregnant women when it was still pretty new.

[Neil Mahoney]

Took us six months to get reimbursed.

[Stephen Dubner]

They were sludge with trying to figure out whether the issue is with health insurance or the pharmacy benefit managers or the pharmacy chain.

[Neil Mahoney]

I'm a psychologist at my work. In a hospital. To send a report to another hospital, a client has to fill out a paper copy and pay money to access their report, which is their health information. And we can't send those reports electronically. In one case, we actually had to mail the report to another agency in our city. I've made 12 calls to the insurer, spoken with seven different people, and spent over 30 hours trying to understand their deductible accumulators. I have reconciled 17 pages of printouts.

[Stephen Dubner]

Against my own Excel spreadsheet and have.

[Neil Mahoney]

Identified $350 owed back from a provider due to a deductible recalculation in June.

[Stephen Dubner]

It really shouldn't be this difficult and time consuming for any of us. One reason that healthcare sludge is such a big problem is that healthcare is such a big industry. It makes up nearly 20% of our GDP and it employs more people than any other industry. So I went back to Richard Thaler to find out more about healthcare sludge.

[Richard Thaler]

Talk to Ben about that.

[Stephen Dubner]

Talk to Ben about that. He says, in the history of Freakonomics Radio, there's only been one ironclad rule. Do what Thaler says. So I made that call.

[Neil Mahoney]

My name is Ben Handel. I'm an economics professor at UC Berkeley working in the areas of healthcare economics, industrial organization, and behavioral economics.

[Stephen Dubner]

I asked Handel to start us off with an example of what he thinks of as healthcare sludge.

[Neil Mahoney]

One example is, can you find which doctors are actually covered by your health plan? Let's say you are going to look for a doctor on the insurer's website. A lot of times the provider database, it's not organized, it's not updated. You have no idea if there's a waiting list for any doctor. So if you just go down the list, you might have to call 25 doctors.

[Stephen Dubner]

Let's take that example and drill down a bit. Where does that sludge come from? Is the insurer just not working hard enough to keep their database updated? Maybe they don't have the commercial incentive to do so. Or are they intentionally making it harder to find a doctor because if the customer doesn't find a doctor, the insurer won't have to pay? Or is the list maybe a mess because doctors are moving out of insurer networks because doctors have encountered so much sludge?

[Neil Mahoney]

Yeah, I think you frame this really well because those are the two dimensions I think about here. And I think it's actually very hard to identify between them. The two dimensions are, is the firm actively trying to make it harder for consumers, which is plausible. And then the second dimension is, are they just doing a bad job because they're not motivated? Take UnitedHealthcare or some huge insurer, right? This is the fifth or sixth biggest company in America, huge amounts of resources, and they're selling a major product to consumers. Now compare Your experience looking for doctors in the network to the experience of shopping on Amazon.com Amazon, Target, all these retail companies. Everything is designed to help you make your purchase as easily and quickly as possible. It's almost seamless. Sometimes you don't even know you're buying stuff or my kids are buying stuff and I don't know it. You look at the healthcare firm, there's none of that. It's the exact opposite. It's like a website from 20 years ago. It's super clunky. You're not getting the information you want. Are they actively making the website that way? No. I don't think you would look back in time and say they actively made it worse. However, they're also not using the obvious tools available that other firms in other spaces are using to make the experience better.

[Stephen Dubner]

Let me just devil's advocate that for a second. Providing healthcare is obviously more complicated than providing, you know, a box of paperclips. Even if the paperclips are coming from a factory in China that you have no relationship with, there are middlemen who make that really easy. And it's a commodity product, and healthcare is not a commodity product on either the provider or the consumer side. So I think we can all understand why it would be a lot more complicated to find, let's say, a good specialist within my health care plan than it would be to find the paper clips that I want on Amazon. That said, as you just noted, these health care firms are among the biggest firms in the country and health care is one of the biggest industries. So overall, how costly is all this sludge? Not just in dollars and time loss, but in healthcare not provided.

[Neil Mahoney]

Let me start with your contention that it's a lot more complicated.

[Stephen Dubner]

You're gonna tell me how complicated paperclips are?

[Neil Mahoney]

No, I'm not. I'm not. It is a lot more complicated. The healthcare insurer is providing different things. Let's take the list of provider networks. That's easy. That's just as easy as Amazon listing.

[Stephen Dubner]

Products because they're not providing care. They're providing a list of people who provide care.

[Neil Mahoney]

It's just a list. It's a list of saying, we allow this. And they have to know the answer to that question because they're going to cover it or not. If you take another step and you said, okay, now we want to know the prices, then I agree with you. Then healthcare providers, they're often not going to really quote prices. And it's very complicated for the insurer to say, this is what the price is going to be for this service because the provider might do six things and they don't know which six things they're going to do. Now, let's think about the cost. Your other question, for the overall system, this is also complicated. And the reason it's complicated is that it relates very closely to just how do you design a health system overall? The reason is that unlike many products, like retail products on Amazon or whatever, healthcare system and healthcare system design, they're set up to ration care.

[Stephen Dubner]

What do you mean by ration?

[Neil Mahoney]

So most products, consumers have money and they either buy them or they don't. And then Econ101 applies supply, demand, et cetera. In health care, there's a whole host of other issues, and those issues are caused by the fact that as a society, we don't want to make people pay for all of their own healthcare. Say someone has a serious disease going to cost $80,000 and that person has no money. We want them to get care, but we don't want them to pay for it. Okay? That means we're in a world where price rationing doesn't work. And so then all healthcare systems around the world and in different settings in the US they're set up with some basket of rationing policies, some basket of policies that say, we're not going to give you everything you want, and we're going to have to have some mechanism to figure out what you get and what you don't get. Almost every other market that's prices, Amazon is going to charge you $65 for something. You either buy it or you don't. Health care that doesn't work because we say we're going to charge you $80,000. And the person says, well, I'm insured, I'm not paying this.

[Stephen Dubner]

How much of this complication is due to the fact that the US has such a different system of healthcare providers than just about every other wealthy country. Going back to what some people think of as the original sin after World War II, when health insurance became something that companies buy for their employees rather than having some kind of national health service.

[Neil Mahoney]

I think it's closely related. Take a system like the uk, where there's nationalized health care. What are the rationing policies there? How are they limiting care so that people aren't just consuming everything? They want time, they have time, they make you wait in line. And then they also have an institute called nice, the National Institute for Clinical Excellence. And there they just crunch numbers, cost benefit. And they say, as a national health system. We're going to cover this thing and not this thing. The US has a privatized system, as you mentioned, much more privatized. What that means is that while there's some regulation in the U.S. the onus is really on insurers. UnitedHealthcare, Aetna, Humana, Blue Cross. The onus is on the insurers to form that basket of rationing policies. What that means is that instead of having some kind of centralized national way, you're rationing healthcare. Your insurance company is saying, okay, we have to ration healthcare in some way. If we don't ration healthcare, our premiums are gonna be sky high, nobody's gonna choose our plans, and we're going to go out of business.

[Stephen Dubner]

So are you saying health care is rationed by sludgy complication?

[Neil Mahoney]

Yes, exactly.

[Stephen Dubner]

So not unintentional?

[Neil Mahoney]

No, not unintentional. And in fact, this is common. The difference is that in systems around the world, Canada, the uk, et cetera, there's intentional sludge, but I would call it organized sludge. In the US Say you're with United. You go look at the provider network list and you look for specialists. You call 52 specialists who have no availability. And then on number 53, they say, yeah, we'll see you in like three and a half months. And then United says, okay, but you have to do prior authorization from your primary care doctor before you can see the specialist. You didn't know that in the US it's just more disorganized. But the principle is the same. The principle is that we can't give you everything you want because of saving money. We don't want the percentage of GDP of health care to be 52%.

[Stephen Dubner]

I mean, it's already double any other country, right?

[Neil Mahoney]

Yes, that's correct. About 20% right now. And most Western countries, the 12 or 11 may be the high end of the next wave. These companies, they all have to find a way to ration. When you pick the plan, it's not transparent at all. Right? You're not going to read page 97 in the booklet about this is what we do for prior authorization. You're a consumer, you see a basket of health plans that you're choosing, and you see one is a lot cheaper than the other one. And you think, well, I'm pretty healthy and I don't have a ton of money, so this looks better, right? Then after the fact, you actually go to get care and you experience this whole gamut of sludge.

[Stephen Dubner]

One reason the US healthcare system is so sludgy is because it is primarily made up of private firms, a massive constellation of actors, each with their own incentives. So this makes any across the board sludge reduction hard. The UK system is at least more centralized, which means one movement can affect millions of people. Prime Minister Keir Starmer recently made such a move by abolishing an oversight body called NHS England. He said he wants to cut bureaucracy and duplication, or as he called it, stodge, a sludge by any other name, I guess. Coming up after the break, how does all that healthcare sludge affect physicians? I'm Stephen Dubner. This is Freakonomics Radio. We'll be right back. Freakonomics Radio is sponsored by LinkedIn. As a small business owner, your business is always on your mind. So when you're hiring, you need a partner who's just as dedicated as you are. That hiring partner is LinkedIn jobs. When you clock out, LinkedIn clocks in. They make it easy to post your job for free, share it with your network and get qualified candidates that you can manage all in one place. LinkedIn's new feature can help you write job descriptions and then quickly get your job in front of the right people with deep candidate insights. At the end of the day, the most important thing to your small business is the quality of candidates. And with LinkedIn you can feel confident that you are getting the best. Find out why more than 2.5 million small businesses use LinkedIn for hiring today. Find your next great hire on LinkedIn. Post your job for free at LinkedIn.com freq that's LinkedIn.com freak to post your job for free, terms and conditions apply. Freakonomics Radio is sponsored by Wells Fargo. This is an ad for the Active Cash credit card from Wells Fargo. That's a mouthful, but that's because it packs in a lot. Earn unlimited 2% cash rewards on purchases with it. So whether it's buying tickets to the game or grabbing a coffee, earn unlimited 2% cash rewards on purchases made with it. Let's say it together. The Active Cash credit card from Wells Fargo. Learn more@wells fargo.com ActiveCash terms apply. If you love your phone but not your carrier, just switch to T Mobile. You can keep your phone, keep your number and we'll help pay it off up to 80%. $800 per line. You can also use our savings calculator to compare our plans and streaming benefits against Verizon and AT&T. So switch and keep your phone, keep your number and keep more of your moolah@t mobile.com up to four lines via virtual prepaid card. Allow 15 days qualifying unlock device credit service port in 90 plus days with device and eligible carrier and timely redemption required. Card has no cash access and expires.

[Ben Handel]

In six months.

[Stephen Dubner]

Here is one of the biggest riddles of our time how can it be that Americans spend more on healthcare than any other country? Way more, but that we don't have the best health outcomes? There are a lot of answers to that question, a lot of different kinds of answers, and we've explored some of them before on this show. One answer you don't often hear is sludge. But just think about how much of our time and money is turned into waste by our gigantic healthcare machine machine just because things don't work the way they're designed to work. Take something as simple as how healthcare providers communicate with their patients. It's often confusing, sometimes contradictory or impenetrable. Also wildly redundant. A blizzard of automated notifications and requests to fill out the form you've already filled out and that no one will end up looking at anyway. One effect of sludge is that it turns all of us into our own administrative assistants. Even simple email threads are no longer simple. They've gotten sludged up by those long legal disclaimers that some people attach to their every email signature. So what could have been a nice clean email thread becomes a sludge forest that you have to hunt through in order to find the actual message. And now try doing this on a screen the size of your palm. This kind of sludge is not only frustrating, it's deeply inefficient and costly, and it leads to mistakes. There is, of course, one way to fight sludge by hiring someone to process it for you. As some academic researchers have pointed out, sludge favors the powerful, the wealthy, and the healthy. But if you don't have the ability or the resources or the time to process all that sludge, you are at a big disadvantage. So getting back to the question I raised a minute ago. How can it be that we spend so much money on health care and don't get the best health outcomes? I would argue that sludge is probably a major contributor. For instance, there is research showing that a huge share of older adults struggle to use medical documents like forms or charts. So what good is a world class system of clinical and research expertise if people can't properly access that system? I went back to the economist Ben Handel and asked him how much he thinks sludge contributes to our very high cost of healthcare and our less than Great outcomes.

[Neil Mahoney]

Okay, this is going to be kind of a funny answer. Let me just first say up front, I don't know the answer to this question. However, I think it's equally plausible that sludge lower spending, probably more plausible that it lowers spending, because the whole point of the sludge is to do less healthcare. And so actually, insurers, with the sludge and all of these rationing mechanisms, they're probably contributing to lower costs, even though we don't necessarily like that experience.

[Stephen Dubner]

Let's back up for a minute here to see where Handel is coming from. His interest in healthcare economics goes back to when he was getting his PhD from Northwestern University. He managed to get his hands on a very large, large and detailed set of insurance data.

[Neil Mahoney]

It's a data set for one large employer with about 10,000 employees offering a menu of insurance options and basically had data on every medical claim, every interaction with a doctor. I could observe the menu of options, the premiums people were paying. I got really into the nitty gritty details, and then I collected that up into studying insurance choice in a behavioral sense.

[Stephen Dubner]

Insurance choice, meaning picking your plan, correct?

[Neil Mahoney]

Exactly. Picking your plan. I was looking at the data and I said, wow, some of these consumers are making just terrible choices.

[Stephen Dubner]

Handel found that just about every health plan offered to employees included what he calls a dominated option. That's a phrase that comes from game theory, and in this case, it means an option that is objectively worse than every other option. Theoretically, firms should not offer this option and no employees should choose it. But they did, and they do. Here's how Ben Handel put it. Later in a research paper he wrote along with Joshua Schwartzstein, There is strong evidence that people do not translate readily available information into knowledge that would help them make better decisions.

[Neil Mahoney]

What I showed there is that people were losing at least $1,000 by choosing one option versus the other. And these were often poorer people earning less than $40,000 a year.

[Stephen Dubner]

I mean, my first question there would be, you're saying these are employed people getting insurance through their employer. Why are the firms offering such bad choices?

[Neil Mahoney]

There's a combination of factors. The answer I usually give is that the firms don't know they're offering a dominated option. Since I wrote that paper, there have been a couple studies, one by Justin Sydnor, who's at the University of Wisconsin. And what he found was that this was happening because of the way firms update their premiums according to algorithms, but in a naive way. So they're not trying to offer these dominated plans. In fact, offering Them often works against the goals of the firm.

[Stephen Dubner]

The goal is both financial for them and providing good care for their employees.

[Neil Mahoney]

Exactly. But still, they were doing it.

[Stephen Dubner]

The story that you're telling now about these firms offering pretty bad plans to their employees suggests that firms have as hard a time navigating these health care insurance plans as civilians do. Is that too shorthandy or is that what this amounts to?

[Neil Mahoney]

I think that's broadly accurate, yes. But the smaller the firm, the smaller operation you have in hr, the more likely you are to be offering a menu like this.

[Stephen Dubner]

So is it, in that case, the, quote, fault of the firm, or is it the fault of the healthcare provider who is knowingly offering a suboptimal plan with the knowledge that most people are going to have a really hard time telling good from bad?

[Neil Mahoney]

Yeah, that's a good question. I think it's typically more the fault of the employer. And the reason is that they're often bringing together plans from different insurers. And if they're bringing in plans from the same healthcare insurer, they're often giving differential subsidies to those plans based on how much of the premiums they want to cover for employees.

[Stephen Dubner]

Meaning the firm comes up with a subsidy that they are going to then recoup from the employees. But they may differ from plan to plan.

[Neil Mahoney]

Exactly.

[Stephen Dubner]

And you're saying they're mispricing those subsidies? It sounds like, yes. Is this a case where the price that you're looking at and the terms that you're looking at are simply not transparent enough, or is it miscalculations on behalf of the employer?

[Neil Mahoney]

It's kind of in the middle. The way I would describe it is that the premium, which is how much you're being charged for the whole year, for example, just to be in this health plan. That's something people understand well, because it's a fixed price.

[Stephen Dubner]

You can figure it out.

[Neil Mahoney]

Yeah, exactly. The more complicated part that consumers often struggle with is all the stuff that happens after that. So what's the deductible? What's the cost sharing? What's the coinsurance rate? In fact, my co authors and I, we've run surveys and tied it to the choices people make. And I mean, just to be honest, people basically, like, don't understand these terms. One nice example we're studying a firm that offers two health plans. So it's simple, just two options. One of the options is labeled as more generous, and one is labeled as less generous. And that's true for these options financially. However, both options give access to exactly the same doctors. Okay. So we ask consumers, hey, do you think that the more generous option gives you access to more doctors? About 40% of people say yes. And what we find using the actual purchase data, is that conditional on health risks or how healthy they are. Those people who think that the more generous plan gives them access to more doctors are willing to pay $2,000 more per year for that plan. That gives you a sense of this uncertainty. Right? That's something that's not real. $2,000 gone, but people don't know. And the reason is that it's very hard to get certainty on this dimension.

[Stephen Dubner]

But the kind of certainty you're talking about isn't just the certainty of what you will need over the coming year. It's what the plan actually includes. Is that right?

[Neil Mahoney]

Yes, exactly. That's very common. We talked about the sludge that insurers impose on patients. We haven't talked yet about the relationship between insurers and doctors and insurers and providers. In fact, insurers routinely make the case that they're the only thing holding us back from healthcare spending being 30% of GDP, because they're the ones bargaining with doctors and trying to get lower prices.

[Stephen Dubner]

What's the sludge there, though, between providers and healthcare firms?

[Neil Mahoney]

So with what I was just talking about, with the bargaining, I don't think that that's a sludge area, but there is a whole important sludge area which comes from the rationing restrictions insurers impose that doctors have to mediate and contend with. So let me give you an example. Say an insurer denies care for something, and then the physician has to haggle with the insurer to get any money from this payment because the provider is often not going to make the patient pay. Essentially what the insurer does is they impose all of these administrative burdens on the doctor's paperwork back and forth with the insurer. And this paperwork is all designed to discourage care, or, as the insurer would say, encourage appropriate care. One of the things that we've seen in the past five to ten years is physicians becoming completely fed up dealing with insurers. There's a recent article in the American Journal of Managed Care that the survey is like 500 physicians, and it basically shows 94% of physicians say these administrative issues are a huge burden. 64% say they've experienced burnout in part because of these administrative frictions, and that they might want to leave becoming a doctor. And what this has led to is the last five to 10 years, insurers and venture capitalists have just been hoovering up all the smaller doctor practices. And so now it's almost, I won't say impossible, but it's extremely hard in the US to be a small independent physician practice. You almost have to be part of a big company, whether that's a big part corporate physician group or an insurer led physician group. And the reason is you need someone to take some of this administrative burden off of you.

[Stephen Dubner]

You need someone to process your sludge.

[Neil Mahoney]

Exactly. And if you don't have that, you're not a doctor, you're a sludge processor.

[Stephen Dubner]

The more I hear from Ben Handel, the more I believe that sludge isn't just a nuisance, it's a cancer. It's a malignancy that turns otherwise healthy tissue sick. Think about it. Administrative burden for physicians leads to more and more independent practices being essentially forced to join a big corporate practice, which, given the way big corporate healthcare operates, will produce even more sludge, which will infect even more healthy tissue. Healthcare is obviously a big and important important sector, but let's be honest, sludge is everywhere. And the digital revolution has driven the spread. Early on, the Internet was relatively free of sludge. Now it's soaking in it. In 2023, the American dialect Society named as its Word of the year ensfication, which had been popularized by the writer Cory Doctorow. Let me read you a passage that Doctorow wrote. Here is how platforms die. First they are good to their users. Then they abuse their users to make things better for their business customers. Finally, they abuse those business customers to claw back all the value for themselves. Then they die. I wrote to Doctero to ask him about healthcare sludge. I used as an example the automated notification syndrome and whether that counts as what he calls enshitification. Here's what he wrote back. The example you mentioned overlaps broadly with enshitification. You have concentration in both medical providers and in IT suppliers who deliver tools like automated reminder software. You have a general lack of regulation prohibiting this kind of harassment. And you've got the flexibility and speed of digital tools which enables new kinds of f ery not seen in previous eras. So, coming up after the break, let's talk about these new kinds of f ery.

[Ben Handel]

Eight minutes later, I realize that $13 breedable is going to cost me $25.

[Stephen Dubner]

I'm Stephen Dubner. This is Freakonomics Radio. We'll be right back. Freakonomics Radio is sponsored by Amica Insurance. At Amica, you will receive coverage with compassion when you choose Amica. They'll take the time to explain your options for auto, home and life insurance. You can feel confident knowing that they'll protect what matters most to you. Amica will provide you with peace of mind. Go to ameca.com and get a quote today. If you have a locked AT&T phone, we're here with bolt cutters. T Mobile will help pay off your locked phone and give you a new 5G phone for free. All on America's largest 5G network. Visit t mobile.com CarrierFreedom via virtual prepaid MasterCard in 15 days. Free phone up to 830 via 24 monthly bill credits plus tax and a 10 device connection charge. Qualifying port in trade and service on Go5G next and credit required. Contact us before canceling entire account to.

[Neil Mahoney]

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[Stephen Dubner]

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[Richard Thaler]

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[Neil Mahoney]

See up for terms.

[Stephen Dubner]

When we asked listeners to send in examples of sludge, a lot of you said you had had trouble with what Richard Thaler calls the subscription trap. Here is Travis Tatman from Ohio. Hey guys, I've got a sludge story for you. I subscribed to a UK based political news journal. Decided after about a year that I wanted to cancel the subscription.

[Neil Mahoney]

Went to my account on the website to unsubscribe.

[Stephen Dubner]

There was no digital option from what.

[Neil Mahoney]

I could see, so I called the.

[Stephen Dubner]

Toll free number, got an automated system for a few minutes. Finally got through to a human. The human told me they had a few questions for me even though I said please cancel. It took me through a handful of questions that went on for about 10 minutes. I finally got them to agree to cancel. Was super frustrated. It's just an example of how it.

[Neil Mahoney]

Takes 30 seconds to subscribe and 20.

[Stephen Dubner]

Minutes to get out of the subscript. And here is Neil Mahoney.

[Ben Handel]

I had a general impression from my own experience but from talking to people as well, that nobody can keep track of their Subscriptions.

[Stephen Dubner]

Mahoney isn't just a sludge victim. He is a professional sludge fighter. And he didn't call us. We called him.

[Ben Handel]

I'm a professor of economics at Stanford University.

[Stephen Dubner]

Mahoney worked on healthcare reform in the Obama administration. He served on the National Economic Council in the Biden administration. And now back at Stanford, I am.

[Ben Handel]

The new director of the Stanford Institute for Economic Policy Research, cper, and we try to bridge between economic research and economic policy.

[Stephen Dubner]

And when you say you had a general sense of the subscription trap from your own experience, would you like to share that or is it embarrassing?

[Ben Handel]

No, I'm happy to commiserate with others. I'm a big soccer fan. If you're a big soccer fan, you need to sign up for Peacock for Paramount, for espn. You know, my team is Arsenal, Premier League team.

[Stephen Dubner]

And then you follow others. You're going to watch the Euros and the World cup and all that.

[Ben Handel]

Exactly. Soccer season is nine months long. When I signed up, I tell myself, oh, I'll cancel it at the end of this tournament, at the end of the spring. And like clockwork, spring happens, summer happens, fall, the league is starting again, the tournament is starting again. I sign in, I'm like, ugh, I didn't cancel. I paid for four months of subscription that I didn't need. So we all had examples, but we didn't know how big this issue was. How much consumers are paying for subscriptions that they would prefer to cancel if it was easy to cancel.

[Stephen Dubner]

I'm just curious, as an economist, how do you describe what's happening there? It sounds like you're implying that if a consumer was given the choice every month to say yay or nay, that they would often say nay, but they kind of slide down the slope into saying yay. Is there a phrase or framework for that problem?

[Ben Handel]

The language that economists use is active versus passive choice. So if I'm making an active decision, I'm thinking about, well, this is how much value I get from my Peacock subscription that allows me to watch my soccer team. This is how much it costs, you know, 9.99amonth. My willingness to pay is higher than cost. That was an active decision versus just set it and forget it.

[Stephen Dubner]

So you and your co authors have noticed that this is a common practice. What do you decide to do about it?

[Ben Handel]

I had this aha moment at Stanford. We have an arrangement with one of the big payment card networks. So we have data on tens of millions of people's credit card and debit cards.

[Stephen Dubner]

Can you name this Firm.

[Ben Handel]

I cannot name this firm. There's four of them. Visa, MasterCard, Discover, and Amex. So you can narrow down. I had this realization that when your credit card expires or you lose your credit card, you have to go back into these websites and enter a new expiration date or enter the new three digit security code. And that forces you to make an active decision. The data is going to reveal what people do when they have to pay attention. And through comparing behavior, we could learn what would happen if they were paying attention more often.

[Stephen Dubner]

So Mahoney and his colleagues sifted through this massive data set. For research like this, the data is always anonymized. And they focused on payments to the big subscription services, music and movie streamers, news outlets, beauty boxes, home security companies, et cetera. Their hypothesis, as Mahoney just explained, was that there would be a difference in cancellation rates between people who recently had to renew their credit card versus ones who didn't. So what'd they find? Let's start with what a typical cancellation rate is for these subscription services. When things are in a steady state.

[Ben Handel]

We see 2% of people on average canceling per month in a steady state. And then during the months of expiration, suddenly four times as many people are canceling their product.

[Stephen Dubner]

And that's simply a result of, would you describe it as their attention is being put on this thing where their attention had not been before?

[Ben Handel]

Yeah, they're forced to actually make an active decision. Do I value this product more than the cost?

[Stephen Dubner]

Do you have any sense of whether people even remember that they have that subscription? Are a lot of people canceling because they're like, oh, I didn't even know that I still am paying for that? Or is it more like now that I have an opportunity that's kind of a lot for something that I don't really like that much, and so I might as well cancel Something that comes.

[Ben Handel]

Out of the results is you see much smaller increases in cancellation for products where there's an information feedback loop. If you're getting groceries or coffee or something like that delivered at your door and you're not on vacation, you're going to know that you have that subscription because otherwise there'll be rotten groceries at your door. And so naturally for those products, you don't see this big spike in cancellation. So that suggests to me that people know that they're signed up, but for.

[Stephen Dubner]

That magazine you subscribed to because you wanted to read one article three years ago.

[Ben Handel]

And even worse, for the credit monitoring type app, maybe your workplace was hacked. They signed you up for, or you signed up for three months of free service which switched over to a monthly subscription. You didn't know you were paying for it. There's no information feedback loop unless you're looking through your credit card statement that you're paying for it. So for things like that, you see these huge, huge spikes.

[Stephen Dubner]

Can you give a sense of, therefore the economic impact of that?

[Ben Handel]

If four times as many people are canceling, then if you write down a model where people pay attention some of the time during regular months and then 100% of the time during the period when their credit card is being renewed, you can back out. How often people are paying attention during regular months? It's roughly a quarter of the time. And then we use that framework to ask what I think are natural questions. How much less would people spend? Or for how many fewer months would they be subscribed if they were paying attention all of the time? And that exercise holds features of the world fixed, right? It's assuming that firms don't adjust their pricing. It's assuming that firms don't adjust their product offerings. In that exercise, consumers are spending 200% more money then they would. That's for some products, the ones where it's easy to forget about them. For others, it's only 15, 20% more. Right? That's things with information feedback loop.

[Stephen Dubner]

But if you add all this up, services like these and products like these, do you think of it as large or small? Because it's nothing like a rent or mortgage. It's nothing like, you know, your total food bill is nothing like you'd pay for your child's education, nothing like you'd pay for healthcare. Not saying that there isn't sludge attached potentially essentially to all of those, but I mean, do you feel like you're going after a big target here or millions of small ones? And if millions of small ones, do they add up to big or is it still kind of small?

[Ben Handel]

I think it's right to think about it as lots of smaller problems. The Council of Economic Advisors did a study where they totted up the amount that people are spending on junk fees. They put the number at $90 billion. I think it's something like $650 per household. That number in some sense both underestimates and overestimates the economic impact. It overestimates the impact because when policy restricts or bans these fees, firms will try to increase their prices on other margins to the extent they can. On the other hand, these fees have problematic effects on markets. They generate incentives for firms to come up with new and better junk fees, not to increase the quality or reduce the price of their product.

[Stephen Dubner]

When you're working on these problems, how much collaboration is there with the firms? Do they have a chief sludge officer? And you say, look, there's a hard way to do this in an easy way. The easy way would be for you guys to just. Just not hide so much, not be what seems duplicitous or sneaky. Do you have those conversations?

[Ben Handel]

Yeah. So I have a great example of this. StubHub. StubHub is a big player in the secondary market for sports and event tickets. So, you know, there's this phenomenon where you think your concert ticket is going to be 70 bucks. You go to check out and there's a $35 service fee, shipping fee, et cetera. In. In 2015, they were aware that the backend service charges and other fees that were endemic in the industry were frustrating to consumers. So they thought that there was sort of an opportunity to brand themselves as more consumer friendly and roll all of those fees into an upfront price. And what happens? They start hemorrhaging market share. Consumers. One, they buy less expensive tickets, not in the front of the concert venue, but in the back, because they don't want to bust their budget. Two, they're less likely to purchase, and they come to the realization that even though they're advertising, what you see is what you pay. Consumers don't fully believe that, and after six months, nine months, they reverse course.

[Stephen Dubner]

I guess the economic reason might be, if I were being cynical, it might be what we've learned from behavioral economics, and in fact, what we've learned from nudging, which is make something easy and people will do it. I remember Danny Kahneman once telling me about one of the crazy things that people do is they'll buy a house that's really expensive. And then while they're in the mode of spending a lot of money, they'll also spend way too much on furniture, way more than they would if they were just living there and buying the furniture. And so I wonder if maybe the firms who did it that way make it really easy to spend the $70. Let's say, understand that once you or I commit to spending that 70, if we come to checkout and see that it's 110, we're like, well, you know, I want it. I bought it. Okay, I'll just do it. So, like, is that evil or is that clever?

[Ben Handel]

I mean, firms are going to try and maximize their profits. There's a long literature on what people call drip pricing. You start out with this initial price, and then you drip in fees through the checkout process. And the evidence consistently shows that when you do that, people spend more than they intend to. A good example of this is food delivery apps. Suppose I want to buy Breedable from Chipotle. For me to figure out whether uber eats or DoorDash has the lowest price, I'm going to need to put in my cart, check out, enter my credit card information. Eight minutes later, I realize that $13 burrito bowl is going to cost me $25. And for me to be a good shopper, I would have to do that same process again at another food delivery app. There's just no way I'm going to do it, which means there's no way I'm going to generate the types of market forces that we need to get markets to work.

[Stephen Dubner]

And the next thing we know, you've missed lunch because you were so busy.

[Ben Handel]

No, I've spent $25 on a burrito bowl, which is going to be delicious, but it's too much to spend on a burrito bowl.

[Stephen Dubner]

Richard Thaler likes to talk about what he calls the curse of knowledge. This idea that when you're the firm making some interface or product or service for your consumers, you know how everything works and it doesn't seem that complicated. Whereas if you're at it from the outside, it's a different picture. How much credit do you give that theory?

[Ben Handel]

My sense is a lot of this arises due to ab testing in the online setting. They're just experimenting with things. What happens if I change this font? What happens if I move this button to a different part of the website? What happens if, when you're trying to cancel, I put another screen that first gives people some discounted offer and through that process, they're basically rediscovering behavioral economics. I don't blame firms for ab testing and doing what maximizes their revenue. I think it's on policymakers to put in place safeguards so that optimization leads to better functioning markets, to more surplus for consumers, not to this sort of behavior which makes markets worse in nickels and dimes us.

[Stephen Dubner]

So one more thing, Neil. Do you think that maybe sludge has peaked?

[Ben Handel]

Have we hit peak sludge? Will we look back in time and say December 2024 was peak sludge when the tide of sludge turned? I don't know. I hope so. I am fighting the good fight and the signals I see are encouraging, but that is not a reason to what's the poetic way to say this? To lessen our resolve?

[Stephen Dubner]

Okay, we will not lessen our resolve either. Next week in Part two of this Sludge series, we look for solutions. I'd like to thank our guests today, Richard Thaler, Ben Handel, and Neil Mahoney. Although, between you and me, that's not how we say Mahoney's name around here. When we were preparing to interview him, we kept misspelling his last name in our internal emails. So we came up with a mnemonic device to remember Massachusetts as in Massachusetts, where Mahoney grew up, and then H O N E Y Honey. And that's why Neil Mahoney is known around here as Massachusetts Honey. Boy, I hope he doesn't mind. You don't even want to know what we call Richard Thaler. Anyway, thanks to all of them. And special thanks to all our listeners who sent in their Sludge tape. If you want to hear more about healthcare Sludge, check out an episode we made a while back, number 456, called how to Fix the Hot Mess of US Healthcare. And we will be back next week with Sludge Part 2. Until then, take care of yourself. And if you can, and someone else too. Freakonomics Radio is produced by Stitcher and Renbud Radio. You can find our entire archive on any podcast app [e-mail] where we publish transcripts and show notes. This episode was produced by Augusta Chapman. The Freakonomics Radio Network staff includes Alina Coleman, Dalvin Abuaji, Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Gabriel Roth, Greg Rippon, Jasmine Klinger, Jeremy Johnston, John Schnarz, Morgan Levy, Neal Carruth, Sarah Lilly, Teo Jacobs, and Zach Lipinski. Our theme song is Mr. Fortune by the Hitchhikers and our composer is Luis Guerra. As always, thanks for listening. I'd like to hear you talk about your parents a little bit. I mean, I read a little bit about what they do, but I'm just.

[Ben Handel]

Curious how Goodness, you've been stalking me.

[Neil Mahoney]

The Freakonomics Radio Network the Hidden side of Everything Stitcher.

[Stephen Dubner]

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