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More Health Insurance Choices May Mean More Poor Choices By Consumers

By Wisconsin School of Business

November 13, 2015

New research from Wisconsin School of Business finds expansion of health insurance options still leaves people struggling to pick the right plan 

An insurance economist and his wife, an actuary with a master’s degree in statistics, sit down to pick a new health insurance plan, confident they are well qualified to identify the option that makes the most sense for their situation. But after hours of research and a final decision, they spend months wondering if they selected the best option. How does this happen?

New research from the University of Wisconsin-Madison’s Wisconsin School of Business finds most consumers are not making the best decisions for themselves when choosing a health care plan. Justin Sydnor, associate professor of risk and insurance at the Wisconsin School of Business, and co-authors Saurabh Bhargava and George Lowenstein of Carnegie Mellon University, looked at the decisions employees at a Fortune 500 company made about their health insurance and found that a majority chose expensive, low-deductible plans instead of a high-deductible option that could have saved them an average of $350 per year.

“Our research found that people have a hard time spotting what plans are a relatively good or bad deal for their situation,” says Sydnor at the Wisconsin School of Business. “One of the benefits of health care reform was supposed to be this wealth of options that would allow people to sort themselves into the plan that was right for them. But when the options are too complicated for most of us to understand, consumers aren’t going to get the best outcomes.”

In the past, most people simply accepted the single plan offered by their employer or relied on Medicare or Medicaid. But in recent years, there has been a trend toward providing greater choice, with seniors selecting from numerous and highly differentiated plan options in Medicare Part D or Medicare Advantage, and many consumers in the exchanges created by the Affordable Care Act (ACA) choosing from 40 or more available plans.

Sydnor says the study examined the quality of insurance plan choices made by 50,000 employees of a large U.S. firm, who had to assemble their own health plans by selecting among four cost-sharing elements—deductible, out-of-pocket maximum, copay, and coinsurance. The plans were provided by the same health insurance company and featured the same coverage for both in-network and out-of-network providers.

“We found that even in a situation where there was a standardized menu of plans offered by the same insurance provider and varying on only a few features, employees had a difficult time being able to sensibly compare their options,” says Sydnor. “That problem is only going to be compounded for people who are facing a dizzying array of options under the public exchanges created by the Affordable Care Act.”

Consumers struggling to select a health care plan should take the time to ask questions of their benefits office and get all the details of the costs and benefits associated with each plan rather than assuming that a plan with a lower deductible is their best option. Sydnor recommended a simple test for employees with choices of plans with different deductibles. For each plan, calculate three numbers:

  1. the yearly premium;
  2. the premium plus the deductible (the total spent in a moderately high-use year); and
  3. the premium plus the total maximum out-of-pocket cost (the total spent in a very high-use year).

Comparing the plans on these three numbers will often show the higher deductible plan to be a relatively good deal. For example, in Sydnor’s study, the options included (among others) these two plans:

  • Plan A:  $500 deductible; $2,000 max out of pocket; $1,419 yearly premium ($118.25 per month)
  • Plan B:  $1,000 deductible; $2,500 max out of pocket; $817 yearly premium ($68 per month)

Roughly the same number of employees chose Plan A as Plan B, suggesting that many might have had a hard time deciding between them. But running Sydnor’s test yields an interesting result:

  1. Premium comparison:     Plan A = $1,419    vs.     Plan B = $817      (Plan B looks better)
  2. Premium + Deductible:   Plan A = $1,919    vs.     Plan B  = $1,817  (Plan B looks better)
  3. Premium + Max OP:       Plan A = $3,419     vs.    Plan B = $3,317   (Plan B looks better)

Sydnor concludes, “Once we combine the premiums with the potential out-of-pocket spending, the comparison becomes much clearer, and the higher deductible plan in this case leads to lower total spending for the year in every scenario.”

Sydnor’s research, “Do Individuals Make Sensible Health Insurance Decisions? Evidence from a Menu with Dominated Options”, is available on the National Bureau of Economic Research website.