Drip Pricing and Market Forces

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Bathouse Book today at bathhouse dot comot Host unforgettable backackyard barbecues with savings from Whole Foods Market. Get the good times going with made in house chicken or pork sausages and ready to cook kebabs for hassle free flavor. Grab tasty flatbreads and their new balsamic chicken salad in the prepared foods department Keep things fresh with organic red cherries, strawberries and peaches at their peak, And stock up on bug sprays and suncare must haves. Make your summer sizzle at Whole Foods Market. It's Steven Dunner. Some news you may have missed, Congress is considering the unsubscribe Act bill that would make it easier for consumers to cancel subscriptions As you are probably not surprised to learn, the bill is moving slowly Why Well, there's an episode about that We first published it a little over a year ago. I thought it might be nice to play it again now is a bonus episode. We have updated facts and figures where needed. As always, thanks for listening 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, etcetera, etcetera. As I read the letter, I see there is a loophole. 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. It 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 of people online what time their appointments were for and they said they didn't have appointments. They had just 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 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 fifteen minutes, maybe thirty. 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 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. I really thought I had an appointment the way the word is commonly used, but I realized 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. comes in many flavors For instance When it takes thirty seconds to sign up for some subscription service and then forever 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 This is my example of sludge. Sudge, sludge. sludge. Sudge. the sludge was impenetrable. When something is made easier to do, that is called a nudge When it's made harder, 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 try to answer some of those questions because sludge is everywhere and it's time to fight back This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stehen Dubner Here's a voice you may recognize. He's been on the show a few times. If you make things harder, I call that sludge. Kind of a fun Wd for stuff that's the opposite of fun Name, please I Richard Thaylor, I'm a professor at the Booth School of Business at the University of Chicago And you co wrote a book years ago, a beloved book really called Nudge. Correct For anyone who's had the ill fortune to have not read Nudge, how would you describe it 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 context is what exactly Nudge makes things easy Right, It's the WD forty of life Ludge is the opposite Sudge literally is gunk 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? 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. Let me intrude here for just a second to say that Thailer 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 Failer. We both happen 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 free economics. And he proceeded to dispense nudgy advice about tax forms and how to get more people to insulate their atticts All of which left the ministers pleased and enthused Thailer has a can do spirit, and this applies even to the challenge of eradicating sludge. I asked him to start by giving a general description of the problem and whether most sludge is intentional, accidental, avoidable or what? Let's start with a category I'll call inadvertent and or incompetent slut. comes because Somebody didn't think about My favorite example of that is due to a guy called Don Norman. Don Norman is a design scholar who is willing to point out bad design, including what are now called in his honor, Norman Doors. There are doors that have handles that are called 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 thing is designed to do. Not be pushed, 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 poll on a door that needs to be pushed, You're really making life harder than it need be Okay. So that's an example of physical sludge. G me a nice example of a more virtual or representative sludge A simple example is what I call the unsubscribed track where with one click, you can sign up for some Service or subscription 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 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 They're trying to profit maximize by essentially not letting you cancel. Is that what it's about? orr is it more incompetence? or is it something else 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 gym that they're not allowed to go to Nobody's designing that innocently There are some Big suubbscription 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 Are there any good estimates of Sudge as a share of GDP or the overall cost of sludge? No, not that I've seen. And part of the problem is so much of it is time I mean, if we think about the U.S medical system, The sludge has to be in the hundreds of billions of dollars per year When we started working on this episode, we asked listeners to send in examples of sludge in their lives. and many of them did have to do with medical sludge Here are a few of them My wife got the RSV vaccine for pregnant women when it was still pretty new It took us six months to get reimbursed. They were sludgge with trying to figure out whether the issue was with health insurance or the pharmacy benefit managers or the pharmacy chain 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 twelve calls to the insurer ve spoken with seven different people and spent over thirty hours trying to understand their deductible accumulators. I have reconciled seventeen pages of printouts against my own Excel spreadsheet and have identified three hundred and fifty dollars owed back from a provider due to a deductible recalculation in June 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 twenty percent of our GDP and it employs more people than any other industry. So I went back to Richard Thayor to find out more about healthcare sludge Ban about that. He says In the history of freeconomics radio, there's only been one ironclad rule Do what Thailer says. So I made that call My name is Ben Handel I'm an economics professor at UC Berkeley working in the areas of Healthcare Economics, indndustrial organization, and behavioral economics I asked Handel to start us off with an example of what he thinks of as healthcare sludge 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 T just go down the list, you might have to call twenty five doctors Let's take that example and drill down a bit. Where does that sludge come from? Is the insurer 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 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 two dimensions 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 United healthcare or some huge insurer, right huge amounts of resources. And they're selling a major product to consumers Now Comare 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 twenty 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 Let me just devil's advocate that for a second. provroiding healthcare is obviously more complicated than providing you know, a box of paperclips, even if the papercips are coming from a factory in China that you have no relationship with, there are middle men 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 healthcare plan than it would be to find the paper cllips that I want on Amazon That said, as you just noted, these health carere firms are among the biggest firms in the country and health carere 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 Let me start with your contention It's a lot more complicated. You're gonna to tell me how complicated paperclips. No, I'm not, I'm not It is a lot more complicated. The health carere insurers providing different things Let's take the list of provider networks. That's easy just as easy as Amazon listing products because they're not providing care, They're providing a list of people who provide care. 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. thenen Healthcare providers they arere often not gonna 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 retail products on Amazon or whatever Healthcare system and healthcare system design They're set up to ration care What do you mean by ration? So Products, consumers have money. and they either buy them or they don't. And then Econ one hundred one applies, supply, demand, et cetera In healthcare, 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 Let's say someone has a serious disease It's going to cost eighty thousand dollars and that person has no money We want them to get care, but we don't want them to pay for it That means we're in a world where price rationing doesn't work And so then all health carere systems around the world and in different settings in the U.S, they're set up with some basket of rationing policies basket of policies that say We're not going 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 prices Amazon it's going to charge you sixty five dollars for something, you either buy it or you don't Healthca That doesn't work because we say we're going to charge you eighty thousand dollars and the person says, well, I'm insured paying this How much of this complication is due to the fact that the U.S. has such a different system of health carere providers than just about every other wealthy country. goingo back to what some people think of as the original sin after World War II and Health insurance became something that companies buy for their employees rather than having some kind of National Health Service I think it's closely related. Take a system like the UK where there's nationalized healthca 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 U.S. has a privatized system, as you mentioned, much more privatized What that means is that while there's some regulation in the US, the onus is really on insurers United Healthcare, Eetna, Hanna, 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 health carere Your insurance company is saying, okay, we have to ration healthcare in some way. If we don't ration healthca, our premiums are going to be sky high Nobody's going to choose our plans and we're going to go out of business So are you saying health carere is rationed by sludgy complication? Yes, Eactly. So not unintentional 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 I would call it organized sludge In the U.S say you're with United. you go look at the provider network list And you look for specialists You call fifty two specialists who have no availability And then on number fifty three, 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 this specialist. You didn't know that. In the US, it's just more disorganized, but the principle is the same ple is that We can't give you everything You want because of saving money We don't want the percentage of GDP of healthcare to be fifty two percent. I mean, it's already double any other country, right? Yes. That's correct About twenty percent right now and most Western countries, twelve or eleven may be the high end of the next wave In 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 ninety seven 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 One reason the U. S 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 move can affect millions of people. Last year, Prime Minister Kiir Starmer announced plans to abolish an oversight body called NHS England, saying he wanted to cut bureaucracy and duplication, or as he called it, stodge. Sudge 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 Freeconomics Radio. We willll be right back Hard thingsings doesn't always look dramatic Sometimes it's an early workout, a long hike or a full day outside where quitting feels easier than pushing through Real life hard things That's exactly what noon hydration is made for. 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Grab tasty flatbreads and their new balsamic chicken salad in the prepared foods department. Keep things fresh with organic red cherries, strawberries and peaches at their peak. And stock up on bug sprays and suncare must haves. Make your summer sizzle at Whole Foods Market. I'm Keiana and I leveveled up my business with Shopify Once I figured out that Shopify was a thing, I never turn back. I can create a site with my eyes closed. Shopify thinks ahead of us, you know, and it thinks about the customer more than anything. Every day I'm thinking about some other new business, but Shopify is doing it to me because it's so easy to use. It's like I can't stop I'm addicted Start your free trial at shhopify d. com Here is one of the biggest riddles of our time How can it be that Americans spend more on health carere 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 Sudge But just think about how much of our time and money is turned into waste by our gigantic healthcare 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 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 fst 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 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 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 were 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 healthcare 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. What good is a world class system of clinical and research expertise if people can't properly access that system 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. Okay, this is going to be kind of a funny answer Let me just first say up frront, I don't know the answer to this question However I think it's equally plausible that sludge lower spending, probablyably more plausible. that it lers spending. becausecause the whole point of the sludge is to do less healthcare. And so actually ensures with the sludge and all of these rationationaling mechanisms, they Prob contributing to lower costs Even though we don't necessarily like that experience 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 and detailed set of insurance data It's a data set for one large employer. with about ten thousand employees offffering a menu of insurance options, And basically pad 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. Insurance choice meaning picking your plan, correct Exactly. picking your plan I was looking at the data and I said, wow Some of these consumers are making just terrible choices 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. They did And they do. Here's how Ben Handel put it later in a research paper he wrote along with Joshua Schwarstein There is strong evidence that people do not translate readily available information into knowledge that would help them make better decisions What I showed there is that people were losing att least one thousand dollars by choosing one option versus the other And these were often poorer people earning less than forty thousand dollars a year 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 There's a combination of factors, the answer I usually give. 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 Sidor, 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 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. The goal is both financial for them and providing good care for their employees. Exactly But still they were doing it The story that you're telling now about theseese firms offering pretty bad plans to their employees suggests that firms have as hard a time navigating these health carere insurance plans as civilians do. Is that too short handy or is that what this amounts to 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 So is it in that case the quote fault of the firm or is it the quote fault of the health carere 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 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 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 Exactly. 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 kind of in the middle The way I would describe it is at 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, you can figure it out Yeah, exactly The more complicated part 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 co insurance 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. We ask consumers, hey, do you think that the more generous option gives you access to more doctors? About forty percent 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 two thousand dollars more per year for that plan That gives you a sense of this uncertainty, right? That's something that's not real wo thousand dollars gone But people don't know. And the reason is that it's very hard to get certainty on this dimension 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? Yes, Eactly. 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 health carere spending being thirty percent of GDP. becausecause they're the ones bargaining with doctors and trying to get lower prices What's the sludge there though, between providers and health carere firms With what I was just talking about with the bargaining, I don't think that that's a sludge area. Bye There is a whole important sludge area. which comes from the rationing restrictions insurers impose ors have to mediate and contend with So let me give you an example say an insurered 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. 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 five hundred physicians and it basically shows ninety four percent of physicians say these administrative issues are a huge burden sixty four percent 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 ten years, insurers and venture capitalists have just been hoovering up all the smaller doctor practices And so now it almost I won't say impossible, but it's extremely hard in the U.S to be a small independent physician practice You almost have to be part of a big company, whether that's a big corporate physician group or an insurer led physician group And the reason is you need someone take some of this administrative burden off of you You need someone to process your sludge. Exactly And if you don't have that, you're not a doctor. you're a sludge processor. The more I hear from Ben Handle, 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 addministrative burden for physicians it 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 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 twenty twenty three, the American Dialect Society named as its Wd of the year andification, which had been popularized by the writer Corey Doctoro Let me read you a passage that Dctor O wrote Here is how platforms die. First, they're 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 Dctor Oo to ask him about healthcare sludge. I used as an example the automated notification syndrome and whether that counts as what he calls inification Here's what he wrote back The example you mention overlaps broadly with entrification. 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 fery not seen in previous eras. So Coming up after the break. Let's talk about these new kinds of fgery Eight minutes later, I realized that thirteen dollars Bita bowl is gonna cost me twenty five dollars I'm Stepeen Dubner. This is Free e Conomics Radio. We'll be right back Toast Unforgettable backackyard Barbecues with savings from Whole Foods Market. Get the good times going with made in house chicken or pork sausages and ready to cook kebabs for hassle free flavor. Grab tasty flatbreads and their new balsamic chicken salad in the prepared foods department. Keep things fresh with organic red cherries, strawberries and peaches at their peak And stock up on bug sprays and suncare must haavves. Make your summer sizzle at Whole Foods Market With a Capital One Saver card, you'll earn unlimited three percent cashback on dining, entertainment, and at grocery stores. And for a limited time, new card members can earn a two hundred fifty dollars cash bonus after spending five hundred dollars hundred on purchases within the first three months. So grab a bite, grab a seat, and earn unlimited three percent cashback with the Savver card Capital One. What's in your wallet? Terms apply. See capital onene dot com slash saver for details I started Ornaaut in twenty thirteen and we make bike apparel. The best part of Shopify for me is our ability to run the business as essentially non technical people. We're able to admin everything on the back end, front end, and sell things online easily. If Shopify were a bike accessory, I think it would actually be the bicycle It's the thing that you do the thing on. We run the business on Shopify Start your free trial on shhopify. com When we asked listeners to send in examples of sludge, A lot of you said you had had trouble with what Richard Thayer calls the subscription trap Here is Travis Tapman from Ohio Hey guys, I've got a sludge story for you. I subscribe to a UK based political news journal dececided after about a year that I wanted to cancel the subscription Went to my account on the website to unsubscribe There was no digital option from what I could see. So I called the total free number We 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 ten minutes I finally got them to agree to cancel. was super frustrated. It's just an example of how It takes thirty seconds to subscribe and twenty minutes to get out of the subscription And here is Neil Mahoney. I had a general impression from my own experience, but from talking to people as well that nobody can keep track of their subscriptions Mahoney isn't just a sludge victim, he is a professional sludge fighter. and he didn't call us. We called him I'm a professor of economics at Stanford University. 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 the new director of the Stanford Institute for Economic Policy Research Sper And we try to bridge between economic research and economic policy 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? 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 plus for ESBN plus. you know, my team is Arsenal, Premier League team. And then you follow others, you're going to watch the Euros and the World Cup and all that. Exactly. Soccer season is nine months long When I signed up, I tellld myself, well, I'll cancel it 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.' like 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 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. The language that economists use is active versus passive choice. So if I'm making an active decision and'm thinking about This is how much value I get from My peacock subscription allows me to watch my Soarder Dam. this is how much it costs, you know, ninellars ninety nineents a month My willingness to pay is higher than cost. That was an active decision. versus just set it and forget it. So you and your co authors have noticed that this is a common practice. What do you decide to do about it I had this aha moment. at Stanford, we have an arrangement with one of the big card networks. So we have data on Tens of millions bulls, credit card and debit cards Can you name this firm? I cannot name this firm There's four of them visa Mastercard Discover dynamics. So you can narrow down I had this realization that when your credit card expires, 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 Data is going to reveal People do when they have to pay attention. through comparing behavior We could learn what would happen if they were paying attention more often 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 would they find Let's start with what a typical cancellation rate is for these subscription services when things are in a steady state. We see two percent of people on average canceling per month. in a steady state and then during the months of expxiration. suddenly four times as many people. are canceling their product 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 Yeah, they're forced to actually make an active decision Do I value this product More. than the cost. Do you have any sense of whether 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 out of the results is you see much smaller increases in cancellation products where There's an information feedback 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's suggested to be that people know that they're signed up But for that magazine you subscribe to becausecause you wanted to read one article three years ago. 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, you know, 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 cards, Sabman Be you' paying for it for things like that You see these huge Huge spikes Can you give a sense of therefore the economic impact of that 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 one hundred percent of the time During period when they're card is being renewed you can back out how often people are paying attention during regular months 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 two hundred percent M money then they would That's for some products, the ones where It's easy to forget about them For others It's only fifteen, twenty percent more, right? That's Things with Information feedback loop 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, know your total food bill. It's nothing like you'd pay for your child's education, notothing like you'd pay for healthcare. Not saying that there isn't sludge attached potentially 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 I think it's right to think about it as lots of smaller problems The Council of Economic Advisors did a study where they caught it up the amount that people are spending on Junklease the number ninety billion dollars, I think it's something like six hundred and fifty dollars per household That number In some sense, both underestimates and overestimates the economic impact 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. generate incentives for firms to come up with new em better junk fees not to increase the quality or reduce the price of other products. When you're working on these problems, how much collaboration is there with the firms? Do they have, you know, a chief sludge officer? And you say, lookook, there's a hard way to do this and an easy way. The easy way would be for you guys to just not hide so much, not be what seems duplicitous or sneaky. Do you have those conversations Yeah, so I have a great example of this Stub hub 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 seventy bucks. you got to check out And there's a thirty five dollars service fee, shipping fee, et cetera in twenty fifteen, they were aware that the backkend 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 O, 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 to they're less likely to purchase And they come to the realization that even though they're advertising What you see is why you pay. Consumers don't fully believe that. and D Six months, nine months. They reverse course. 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. Remember Danny Konman 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 seventy dollars, let's say, understand that once you or I commit to spending that seventy, if we come to checkout and see that it's one hundred ten, 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 Firmss are. are going to try and maximize their profits There's a long literature on peopleeople called drip pricing You start out with this initial price and then you drip in fees through the checkout process