The World Is (Still) Drowning in Sludge | Freakonomics Radio

Insurance forms that make no sense. Subscriptions that can’t be cancelled. A never-ending blizzard of automated notifications. In this update of a 2025 episode, Stephen Dubner discovers where all this sludge comes from — and how much it’s costing us. You can find the transcript and show notes for this episode on our website here: https://freakonomics.com/podcast/the-world-is-still-drowning-in-sludge/ FOLLOW FREAKONOMICS RADIO: YouTube: https://freak.ws/3yIl6dl Apple Podcasts: https://freak.ws/3yAvQh0 Spotify: https://freak.ws/3TsdCmV ABOUT FREAKONOMICS RADIO: Discover the hidden side of everything with host Stephen J. Dubner, co-author of the Freakonomics books. Each week, Dubner speaks with Nobel laureates and provocateurs, intellectuals and entrepreneurs, and various other underachievers to uncover things you always thought you knew (but didn’t) and things you never thought you wanted to know (but do) — from the economics of sleep to the future of education, from markets for marriage to the surprising utility of wolves. ABOUT THE FREAKONOMICS RADIO NETWORK: Freakonomics began as a book, which led to a blog, a documentary film, more books, a pair of pants, and in 2010, a podcast called Freakonomics Radio. Hosted by Stephen J. Dubner, it’s one of the most popular podcasts in the world, with a reputation for storytelling that is both rigorous and entertaining. Its archive of more than 500 episodes is available, for free, on any podcast app, and the show airs weekly on NPR stations. Freakonomics Radio is now the flagship show of the Freakonomics Radio Network, which includes the podcasts No Stupid Questions, People I (Mostly) Admire, and The Economics of Everyday Things. FREAKONOMICS RADIO NETWORK PODCASTS: Freakonomics Radio: https://freakonomics.com/series/freakonomics-radio/ No Stupid Questions: https://freakonomics.com/series/nsq/ People I (Mostly) Admire: https://freakonomics.com/series/people-i-mostly-admire/ The Economics of Everyday Things: https://freakonomics.com/series/everyday-things/ Special series: https://freakonomics.com/topics/ CONNECT WITH US: [email protected] https://twitter.com/freakonomics https://www.instagram.com/freakonomics/ https://www.facebook.com/freakonomics/ https://www.tiktok.com/@freakonomicsradio https://www.linkedin.com/company/freakonomics-media Subscribe to our newsletter: https://stephendubner.substack.com/subscribe

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:05Stephen J. Dubner?

  Hey there. It's Stephen Dubner. Some news you may have missed. Congress is considering the Unsubscribe Act, a bill that would make it easier for consumers to cancel subscriptions. But 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 as a bonus episode. We have updated facts and figures where needed. As always, thanks for listening.

• 0:39Stephen J. Dubner?

  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, et cetera, et cetera. 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.

• 1:24Stephen J. Dubner?

  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 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,

• 2:08Stephen J. Dubner?

  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

• 2:49Stephen J. Dubner?

  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

• 3:32Stephen J. Dubner?

  is a word for this kind of thing.

• 3:35Speaker 01

  This is my example of sludge.

• 3:38Stephen J. Dubner?

  Sludge. Sludge. Sludge.

• 3:40Speaker 01

  The sludge was impenetrable.

• 3:42Stephen J. 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, that 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.

• 4:31Speaker 02

  This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dubner.

• 4:48Stephen J. Dubner?

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

• 4:52Speaker 03

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

• 5:01Stephen J. Dubner?

  Name, please.

• 5:03Speaker 03

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

• 5:09Stephen J. Dubner?

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

• 5:13Speaker 03

  Correct.

• 5:14Stephen J. Dubner?

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

• 5:19Speaker 03

  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.

• 5:36Stephen J. Dubner?

  A nudge in that context is what exactly?

• 5:39Speaker 03

  Nudge makes things easy, right? It's the WD-40 of life. Sludge is the opposite. Sludge literally is gunk.

• 5:50Stephen J. 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?

• 5:58Speaker 03

  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.

• 6:10Stephen J. 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 Feller. 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.

• 6:55Stephen J. Dubner?

  And he proceeded to dispense nudgy advice about tax forms and how to get more people to insulate their attics, all of which left the ministers pleased and enthused. Feller 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?

• 7:25Speaker 03

  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.

• 7:43Stephen J. 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.

• 7:52Speaker 03

  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.

• 8:13Stephen J. Dubner?

  Not be pushed, you're saying?

• 8:14Speaker 03

  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,

• 8:57Speaker 03

  you're really making life harder than it need be.

• 9:02Stephen J. Dubner?

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

• 9:11Speaker 03

  A simple example is what I call the unsubscribe trap, where with one click, you can sign up for some service or a 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.

• 9:35Stephen J. 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?

• 9:53Speaker 03

  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.

• 10:35Stephen J. Dubner?

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

• 10:43Speaker 03

  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.

• 11:02Stephen J. Dubner?

  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.

• 11:12Speaker 04

  So my wife got the RSV vaccine for pregnant women when it was still pretty new. Took us six months to get reimbursed. There was sludge with trying to figure out whether the issue is with health insurance or the pharmacy benefit managers or the pharmacy chain.

• 11:28Speaker 05

  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.

• 11:55Speaker 06

  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 against my own Excel spreadsheet and have identified $350 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.

• 12:18Stephen J. Dubner?

  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. Talk to Ben about that. 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.

• 12:47Speaker 07

  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.

• 12:57Stephen J. Dubner?

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

• 13:02Speaker 07

  One example is, can you find which doctors are actually covered by your health plan?

• 13:10Speaker 07

  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.

• 13:29Stephen J. 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?

• 14:00Speaker 07

  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 United Healthcare or some huge insurer, right? 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.

• 14:45Speaker 07

  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.

• 15:26Stephen J. Dubner?

  Let me just devil's advocate that for a second. Providing healthcare is obviously more complicated than providing, you know, a box of paper clips. Even if the paper clips 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 healthcare plan than it would be to find the paper clips that I want on Amazon. That said, as you just noted, these healthcare firms are among the biggest firms in the country and healthcare is one of the biggest industries.

• 16:10Stephen J. Dubner?

  So overall, how costly is all this sludge? Not just in dollars and time lost, but in healthcare not provided?

• 16:20Speaker 07

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

• 16:24Stephen J. Dubner?

  You're going to tell me how complicated paper clips are?

• 16:26Speaker 07

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

• 16:38Stephen J. Dubner?

  Cause they're not providing care, they're providing a list of people who provide care.

• 16:42Speaker 07

  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?

• 17:28Speaker 07

  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.

• 17:40Stephen J. Dubner?

  What do you mean by ration?

• 17:42Speaker 07

  So, most products, consumers have money and they either buy them or they don't. And then Econ 101 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. Say someone has a serious disease, gonna 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.

• 18:26Speaker 07

  Some basket of policies that say, "We're not gonna give you everything you want and we're gonna 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, it's gonna charge you $65 for something, you either buy it or you don't. Healthcare, that doesn't work because we say, "We're gonna charge you $80,000" and the person says, "Well, I'm insured, I'm not paying this."

• 18:53Stephen J. 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?

• 19:15Speaker 07

  I think it's closely related. Take a system like the UK where there's nationalized healthcare.

• 19:22Speaker 07

  What are the rationing policies there? How are they limiting care so that people are just consuming everything they want?

• 19:27Stephen J. Dubner?

  Time?

• 19:28Speaker 07

  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 US, the onus is really on insurers. United Healthcare, 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,

• 20:12Speaker 07

  your insurance company is saying, okay, we have to ration healthcare in some way. If we don't ration healthcare, our premiums are going to be sky high. Nobody's going to choose our plans and we're going to go out of business.

• 20:24Stephen J. Dubner?

  So are you saying healthcare is rationed by sludgy complication?

• 20:29Speaker 07

  Yes, exactly.

• 20:31Stephen J. Dubner?

  So not unintentional?

• 20:32Speaker 07

  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 this specialist. You didn't know that. In the US, it's just more disorganized. But the principle is the same.

• 21:17Speaker 07

  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 healthcare to be 52%.

• 21:29Stephen J. Dubner?

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

• 21:32Speaker 07

  Yes, that's correct. About 20% right now, and most Western countries, 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.

• 22:19Stephen J. 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 move can affect millions of people. Last year, Prime Minister Keir 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, 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 will be right back.

• 23:15Stephen J. 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, 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

• 24:00Stephen J. Dubner?

  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.

• 24:44Stephen J. Dubner?

  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 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.

• 25:26Stephen J. Dubner?

  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.

• 25:48Speaker 07

  Okay, this is gonna be kind of a funny answer. Let me just first say upfront, 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.

• 26:21Stephen J. 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 and detailed set of insurance data.

• 26:35Speaker 07

  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.

• 27:06Stephen J. Dubner?

  Insurance choice meaning picking your plan, correct?

• 27:09Speaker 07

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

• 27:18Stephen J. 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 Schorstein. "There is strong evidence that people do not translate readily available information into knowledge that would help them make better decisions."

• 27:53Speaker 07

  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.

• 28:07Stephen J. 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?

• 28:15Speaker 07

  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 of studies, one by Justin Sidnor, 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.

• 28:50Stephen J. Dubner?

  The goals, both financial for them and providing good care for their employees?

• 28:54Speaker 07

  Exactly, but still they were doing it.

• 28:57Stephen J. 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 healthcare insurance plans as civilians do. Is that too shorthandy or is that what this amounts to?

• 29:14Speaker 07

  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.

• 29:25Stephen J. Dubner?

  So is it, in that case, the quote "fault of the firm"? Or is it the quote "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?

• 29:43Speaker 07

  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.

• 30:05Stephen J. 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.

• 30:13Speaker 07

  Exactly.

• 30:14Stephen J. Dubner?

  And you're saying they're mispricing those subsidies, it sounds like.

• 30:18Speaker 07

  Yes.

• 30:18Stephen J. Dubner?

  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?

• 30:28Speaker 07

  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.

• 30:41Stephen J. Dubner?

  Because it's a fixed price, you can figure it out.

• 30:43Speaker 07

  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 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.

• 31:25Speaker 07

  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, so 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.

• 31:54Speaker 07

  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.

• 32:06Stephen J. 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?

• 32:14Speaker 07

  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.

• 32:45Stephen J. Dubner?

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

• 32:49Speaker 07

  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.

• 33:31Speaker 07

  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 10 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.

• 34:11Speaker 07

  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 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.

• 34:44Stephen J. Dubner?

  You need someone to process your sludge.

• 34:47Speaker 07

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

• 34:54Stephen J. 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 that 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.

• 35:38Stephen J. Dubner?

  Now it's soaking in it. In 2023, the American Dialect Society named as its word of the year "ensh-ification", 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 Doctorow to ask him about healthcare sludge. I used as an example the automated notification syndrome and whether that counts as what he calls 'ensh-ification'. Here's what he wrote back.

• 36:22Stephen J. Dubner?

  The example you mentioned overlaps broadly with en-ification. 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-tery not seen in previous eras. So, coming up after the break, let's talk about these new kinds of f-tery.

• 36:55Speaker 08

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

• 37:00Stephen J. Dubner?

  I'm Stephen Dubner. This is Freakonomics Radio. We'll be right back.

• 37:16Stephen J. 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.

• 37:28Speaker 09

  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. Went to my account on the website to unsubscribe. There was no digital option from what I could see, so I called the 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." They 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 takes 30 seconds to subscribe and 20 minutes to get out of the subscription.

• 38:13Stephen J. Dubner?

  And here is Neil Mahoney.

• 38:15Speaker 08

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

• 38:24Stephen J. Dubner?

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

• 38:32Speaker 08

  I'm a professor of economics at Stanford University.

• 38:35Stephen J. 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.

• 38:46Speaker 08

  I am the new director of the Stanford Institute for Economic Policy Research, CEPR. And we try to bridge between economic research and economic policy.

• 38:57Stephen J. 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?

• 39:05Speaker 08

  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 ESPN Plus. You know, my team is Arsenal, Premier League team.

• 39:22Stephen J. Dubner?

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

• 39:26Speaker 08

  Exactly. Soccer season is nine months long. When I signed up, I tell myself, well, 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 like, oh, 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.

• 40:05Stephen J. 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 yea or nay, that they would often say nay, but they kind of slide down the slope into saying yea. Is there a phrase or framework for that problem?

• 40:24Speaker 08

  The language that economists use is active versus passive choice. So if I'm making an active decision, I'm thinking about, 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, $9.99 a month. My willingness to pay is higher than cost. That was an active decision versus just set it and forget it.

• 40:47Stephen J. Dubner?

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

• 40:54Speaker 08

  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.

• 41:08Stephen J. Dubner?

  Can you name this firm?

• 41:09Speaker 08

  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, 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.

• 41:52Stephen J. 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.

• 42:28Speaker 08

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

• 42:42Stephen J. 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?

• 42:50Speaker 08

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

• 42:57Stephen J. Dubner?

  Do you have any sense of whether people even remember that they have that subscription? Are a lot of people cancelling 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?

• 43:17Speaker 08

  Something that comes 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.

• 43:53Stephen J. Dubner?

  But for that magazine you subscribe to because you wanted to read one article three years ago?

• 43:57Speaker 08

  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 card statement that you're paying for it. So for things like that, you see these huge, huge spikes.

• 44:25Stephen J. Dubner?

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

• 44:30Speaker 08

  If four times as many people are cancelling, then if you write down a model where people pay attention some of the time,

• 44:39Speaker 08

  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.

• 45:20Speaker 08

  In that exercise, consumers are spending 200% more money than 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.

• 45:39Stephen J. 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 renter mortgage. It's nothing like, you know, your total food bill. It's 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 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?

• 46:09Speaker 08

  I think it's right to think about it as lots of smaller problems. The Council of Economic Advisers 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.

• 46:53Speaker 08

  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.

• 47:09Stephen J. Dubner?

  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, look, 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?

• 47:28Speaker 08

  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 checkout and there's a $35 service fee, shipping fee, et cetera. 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

• 48:08Speaker 08

  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.

• 48:47Stephen J. 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. It'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.

• 49:32Stephen J. Dubner?

  So like, is that evil or is that clever?

• 49:37Speaker 08

  I mean, firms are, 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 a burrito bowl 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.

• 50:20Speaker 08

  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 the markets to work.

• 50:42Stephen J. Dubner?

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

• 50:45Speaker 08

  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.

• 50:51Stephen J. 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 coming at it from the outside, it's a different picture. How much credit do you give that theory?

• 51:10Speaker 08

  My sense is a lot of this arises due to A B 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 A B testing and doing what maximizes their revenue. I think it's on policymakers to put in place safeguards.

• 51:52Speaker 08

  So that optimization leads to better functioning markets, to more surplus for consumers, not to this sort of behavior, which makes markets worse and nickels and dimes us.

• 52:05Stephen J. Dubner?

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

• 52:11Speaker 08

  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.

• 52:38Stephen J. Dubner?

  Okay, we will not lessen our resolve either. 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. M A, 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.

• 53:23Stephen J. Dubner?

  By the way, this episode was the first of a two-part series on sludge. The other one was on public sector sludge and it's episode number 628. If you want to listen, you can find it in any podcast app. And if you want to hear even more about healthcare sludge, check out episode 456, which is called "How to Fix the Hot Mess of US Healthcare." We will be back very soon with a new episode. Until then, take care of yourself and, if you can, someone else, too. Freakonomics Radio is produced by Renbud Radio. You can find our entire archive on any podcast app. It is also at Freakonomics.com, where we publish transcripts and show notes. This episode was produced by Augusta Chapman and updated by Dalvin Abawaji. It was edited by Gabriel Roth and mixed by Jeremy Johnston.

• 54:07Stephen J. Dubner?

  The Freakonomics Radio Network staff also includes Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Ilaria Montenacort, Mandy Goranstein, Jake Loomis, Pete Madden, and Teo Jacobs. 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 curious how... Goodness, you've been stalking me.

• 54:40Speaker 02

  The Freakonomics Radio Network: The Hidden Side of Everything.