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.

MIAMI, FL - DECEMBER 23: Certified Enrollment Specialist, Julienne Fontes, (R) helps Elva Garcia (L) and Jorge Codevila through the options available to them under the Affordable Care Act at a Miami Enrollment Assistance Center on December 23, 2013 in Miami, Florida. In a symbolic gesture ,U.S. President Obama signed up in the federal health care insurance. The goverment announced today that people will have a grace period exending into tomorow to enroll for a plan that would start January 1st. 
National Journal
Clara Ritger
Dec. 24, 2013, midnight

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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