Most Americans pick the wrong health insurance plan.
Saurabh Bhargava and his colleagues at Carnegie Mellon University conducted a study of almost 24,000 employees at a major Fortune 100 company.
The study found that 61% of them chose the wrong plan for their needs. The researchers estimated that the average employee could have saved $372 per year by selecting a different method.
The average cost of these choices was about 2% of the salary. In 2018, over 8% of Americans’ total household
spending went toward health care costs. This represents about a 37% increase since 2004.
It seems like people aren’t able to maximize their welfare because they’re having trouble understanding the decision environment. It’s just a complicated product, and people have a hard time figuring it out, which is unfortunate because it’s such an important product.So why do Americans struggle to pick the best plan
for them, and how can we fix it?
One major issue in choosing a health care plan is people don’t understand the lingo insurance companies use to discuss each project.
We usually ask every year what is a premium and what is a co-pay?
What does the deductible? And the results are usually pretty depressing.
Only about a third of people usually correctly identify all three. These are the most basic terms to understand this basic lack of literacy, I think, contributes to a number of problems that people have exhibited when they do choose from a plan.
The way plans are presented to people makes it difficult to figure out exactly how much each plan costs.
People have trouble doing the math from going from the features to the consequences. We see things like what’s the deductible of each plan and what’s the copay of each plan and what’s the maximum out of pocket of each plan.
The part that’s difficult is to actually then say, “OK, so suppose next year I break my leg and I go to the hospital.
How much money do I actually spend under each plan?”
There are premiums, which is the amount of money people have to pay each month, regardless of whether they go to the doctor. This is the bare minimum someone would have to pay for their plan each year if they don’t use any health care at all.
There are also deductibles, which is a set amount of money a policyholder has to pay out of pocket in the beginning of each year before the insurance plan will kick in and start sharing costs. It’s common for people experiencing information overload to hyper focus on one aspect of a plan, such as how much the deductible is or how much the premium costs.
Rather than looking at the plan as a whole based on how much health care they’ll actually use over the course of the year.
When you’re in a decision environment that’s complicated, is to try to simplify it for yourself in some way that you can, and often that’s a rule of thumb or what we call a heuristic.
But but in some cases they can go awry. And I think in the case of a lot of health insurance contexts, the heuristics that people use result in them selecting overly expensive plans that that end up costing them quite a bit.
A lot of people are basing their decisions on the absolute numbers they’re seeing presented to them, rather than calculating their financial risk with each plan.
One challenge that I think people have is that while plan choice really should be about your health risk and your willingness to take on financial risks, I think a lot of people, they look at more expensive plans and they
see more expensive plans as being better, almost like choosing a hotel.
Research has shed light on how to best help people determine the plan that makes the most financial sense for them.
Find that showing people the consequences improves the choices that they make.
The best way is to do the math and figure out how much a plan may actually cost over the course of the year based on how much health care the policyholder might need. One study gave people several health insurance plans choose from.
The researchers also gave the study subjects some help choosing their plans by laying out exactly how much each plan may cost based on how much health care they use that year. We designed as this tool that allows you to see for every potential expenditure under each plan, how much money you actually are going to be spending over the course of the year in terms of both the premium you’re going to be spending and then also how much you’re going to be on the hook for relative to how much the plan is going to help you out with. And we could show it in a graph. And you can actually see some plans are above other plans in this graph in terms of how much money you’re spending overall.
And the tool helps people to pick a plan that over the course of the year, they end up on average spending less money. Some employers and state run Obamacare marketplaces are beginning to provide decision aids, such as calculators that help people make the best decisions for them. If you are going to do the math yourself, take into consideration your own health risks when doing so. That means considering the best case scenario
where you may not need any care or just preventative care, and the worst case scenario where you need a lot of care.
You should also be careful to check which doctors are in-network within specific policies because the doctor you go to can change costs dramatically. If you have expensive health conditions or kind of a serious health history, I’m a cancer survivor, so I have a group of doctors who I really want to keep seeing because they’ve saved my life a couple of times, so. So it matters to me that they’re in my plan network.
I can’t necessarily guarantee that all of your doctors or the facilities that you go to, the treatment facilities and so forth are going to be covered. So you’re really going to have to check. It’s not very transparent. So, all the plans have a link to a provider directory, but you know you’re going to have to kind of click into all of them.
It’s also important to revisit a policy every year to see if it’s still the best option that fits your needs, even if your employer hasn’t made any changes to the plan. So only 20-25% of employees and employer-sponsored contexts will actually change their plan from year to year. So, if you choose a poor plan from a financial
basis, then normally you stick with that plan for potentially multiple years, so it can become quite a costly choice.
There are places for people to turn to get assistance If you are looking at marketplace coverage anywhere. There are navigators. These are trained experts who can help you walk through the application, answer any questions.
What am I supposed to fill in here and help you kind of sift through the plan choices and try to figure out how they’re how they’re different and which one works best for you?
Picking the wrong plan means people are spending more money on health care than they have to, and the numbers show it. Health care costs in the U.S. have been rising overall due to a variety of
factors, including out-of-pocket expenses for Americans. Health care spending in the United States
has gone from 6.9% of total GDP in 1970 to more than 17.5% percent as of 2019.
When we are spending that amount of money on health care. That money is not available for other sectors of the economy. The average American household is also spending more on health care. According to federal data, average deductibles in employer plans more than doubled between 2008 and 2017, from $869 to $1,808 . Cost of living as a whole is also getting more expensive, which puts more pressure on Americans because wages have not been keeping up with this increase in prices.
The average household income in the U.S. increased by 27% between 1984 and 2020. In that same time period. The average American household spending on food rose 155%. Spending on housing rose more than 160%, and out-of-pocket spending on medical care rose more than 390%. This burden of income is not keeping up with costs has implications for what kind of plans Americans are drawn to. High deductible plans can be a big problem for a lot of people because they may not have the cash for it.
The recent proliferation of high deductible plans across the employer sponsored landscape is that there’s a
real worry about liquidity and being able to pay for out-of-pocket costs. These liquidity concerns are also driving, driving people to select what end up being fairly expensive plans. Bhargava’s study found that employees earning less than $40,000 per year were much more likely to select a plan that would end up
costing them more money.
Lower income employees were also less likely to switch their plan each year, and even when they did switch, they were less likely than higher income employees to switch into the highest deductible plan. The high deductible plan tends to be the better value over the long term because that plan you’re paying a lower premium, and then under many states of the world, especially the ones where you’re relatively healthy, you end up paying less over time.
Ultimately, economists say that the whole system needs to be simplified in order to provide plans that are higher quality while also being more affordable, Whereby we we get rid of a lot of the complexity of cost sharing and replace it with just a much more simple, much more transparent menu of options.
But attempts to make the actual costs of plans clear can backfire. For example, on the Affordable Care Act marketplace, which is frequently called Obamacare, people are presented plans using a metal tier system. A plan could be labeled as platinum, gold, silver or bronze. These are meant to help people understand the cost
sharing features of each plan, so the platinum plans have the most financial coverage. The insurance company would pay 90 percent of costs at the time of service, and the policyholder would pay the remaining 10 percent.
The trade off is that those plans have a higher monthly premium. At the other end of the spectrum, a bronze plan has the least amount of cost sharing support. The insurance company pays 60 percent of the cost of service and the policyholder pays 40 percent. Research shows that people are misunderstanding the
metals, thinking there are actually a reflection of the quality of the plan, rather than the amount of money they’ll end up paying in monthly premiums or out-of-pocket costs at time of service.
President Biden signed an executive order in July 2021 that aims to improve cost transparency and standardize plans on healthcare.gov starting in 2023. The goal of the order is to make it easier for people to compare across plans. Several states, such as Maine, Massachusetts, Oregon, Rhode Island and Vermont have rolled out budget comparison tools to help people navigate the state’s local health insurance exchanges.
Well, I think giving people access to this type of data in a in a way that is simple to understand would definitely be helpful. Having more information that is easy to understand is very important.
