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You’re Probably Paying Too Much for Your Health Insurance … and It’s Your Fault You’re Probably Paying Too Much for Your Health Insurance … and It...

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You’re Probably Paying Too Much for Your Health Insurance … and It’s Your Fault

New research suggests consumers continually pick more expensive plans than they need.

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Certified Enrollment Specialist Julienne Fontes (right) explains the options available under the Affordable Care Act at a Miami enrollment assistance center on Dec. 23.(Joe Raedle/Getty Images)

Health insurance shoppers do a terrible job of picking the plan that will serve them best, according to a new study.

The study presented subjects with health insurance websites that mirror the exchanges set up by the Affordable Care Act and asked them to pick a plan. The results were not pretty: Left to their own devices, consumers who selected their own plans ended up only slightly better off than they would have had their plans been assigned randomly.

 

When given four options, the consumers chose the most cost-effective plan only 42 percent of the time. When given eight options, the success rate plummeted to 21 percent—a rate indistinguishable from random assignments.

The researchers then repeated the study, but this time with added "cost calculators" on the mock website aimed at helping consumers. Even then, shoppers picked the most cost-effective option only 47 percent of the time, typically choosing plans that would cost them an extra $364.

In a final iteration, researchers offered the shopping choices to M.B.A. students enrolled in a consumer finance class. In this pool—where more than half of the subjects came from consulting or financial-services related fields—consumers made the most cost-effective choice 73 percent of the time, and the average mistake dropped to $126.

 

Doubts about shoppers' ability represent a challenge for Obamacare, which is aimed at curbing the country's expanding health costs while allowing consumers to pick their own plans on the online exchanges.

"If consumers can't identify the most cost-efficient plan for their needs, the exchanges will fail to produce competitive pressures on health care providers and bring down costs across the board, one of the main advantages of relying upon choice and markets," said Eric Johnson, a Columbia University business school professor who coauthored the study.

But why did consumers fail to pick the proper plan?

The researchers concluded that while the math is daunting, the fact that the cost calculators did little to improve outcomes suggests there's more to the problem.

 

Consumers tend to overweigh the importance of premiums and underestimate the costs from deductibles and out-of-pocket contributions, the researchers wrote. Low premium payments are attractive, but for someone who uses a lot of health services, the high deductible that often accompanies the low premium means the consumer will pay the full cost of care until he or she reaches the deductible, when insurance kicks in and starts to share a portion of those expenses.

The researchers say the damage done by poor consumer choices can be at least partly offset by well-designed exchanges.

"The bad news: Consumers left to their own devices seem to make large errors when choosing health insurance, suggesting that they will select options that are not cost efficient and they seem to be unaware of their failure," they wrote. "The good news is that we have demonstrated that exchange designers can improve consumers' performance markedly through the use of just-in-time education, smart defaults, and cost calculators."

Specifically, the researchers urge the websites to sort plans by cost, to present "quality cues," or to limit the number of choices presented to plans that meet certain criteria of cost effectiveness.

Along with Johnson, researchers from Columbia's psychology department, the University of Pennsylvania, the Hebrew University of Jerusalem, and the University of Miami worked on the study.

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