Why Americans Struggle to Choose the Right Health Insurance Plan and How to Fix It
Why Americans Struggle to Choose the Right Health Insurance Plan and How to Fix It
According to a study by Saurabh Bhargava and colleagues at Carnegie Mellon University, almost 61% of nearly 24,000 employees at a major Fortune 100 company chose the wrong health insurance plan for their needs. The researchers estimated that by selecting a different plan, the average employee could have saved around $372 annually, with an average cost of about 2% of their salary.
In 2018, more than 8% of Americans' total household spending went towards healthcare costs, which has increased by around 37% since 2004. This suggests that people may struggle to maximize their welfare due to difficulty in understanding the decision environment. Health insurance is a complicated product, and people often have a hard time figuring out which plan is best for them.
One of the major issues in choosing a health care plan is that people don't understand the insurance companies' terminology used to describe each plan. Terms like premium, co-pay, and deductible are the most basic terms that people should understand, but only about a third of people can correctly identify all three. This basic lack of literacy contributes to a number of problems when people 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 calculating how much they would spend under each plan if they break a leg and go to the hospital, for example.
There are premiums, which are the minimum amounts people must pay each year if they don't use any health care at all, and deductibles, which are the set amounts of money a policyholder has to pay out of pocket in the beginning of each year before the insurance plan kicks in and starts sharing costs. When people experience information overload, they tend to hyper-focus on one aspect of a plan, such as how much the deductible or 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.
In complex decision environments, people tend to simplify things for themselves by using rules of thumb or heuristics. However, in some cases, these heuristics can lead people to select overly expensive plans, resulting in high costs. People tend to base their decisions on the absolute numbers they see, rather than calculating their financial risk with each plan. Research shows that showing people the consequences improves the choices they make.
The best way to determine the plan that makes the most financial sense is to do the math and figure out how much a plan may cost over the course of the year based on how much health care the policyholder might need. Decision aids such as calculators that help people make the best decisions for them are being provided by some employers and state-run Obamacare marketplaces. If you're going to do the math yourself, you should take your own health risks into consideration, including best and worst-case scenarios, and also check which doctors are in-network within specific policies because the doctor you go to can dramatically change costs.