It’s open enrollment season, and many individuals have important choices to make about their health insurance plans. My new research, conducted with Saurabh Bhargava and George Loewenstein of Carnegie Mellon University, suggests people should look carefully at health insurance options with higher deductibles before they commit to an insurance plan.
In recent years, we’ve seen a big shift toward choice in insurance planning—in Medicare Part D, the ACA exchanges, and even in most employer-sponsored plans. This move toward choice is motivated by the idea that people can be savvy insurance consumers and, if given options, will sort themselves into the plans that are best for them. Our work, however, joins a number of recent studies that show health insurance is too complex for most people to understand—therefore making it unlikely that most consumers will make optimal decisions for themselves.
We studied the decisions employees at a Fortune 500 company made about health insurance coverage. The company we studied ran an interesting experiment: They gave employees the ability to choose their coverage features by selecting their deductible, co-insurance rate, copayment level, and maximum out-of-pocket cost from a menu of options. The problem was that the combinations that involved lower deductibles were extremely expensive relative to combinations with the largest deductible, which was $1,000.
What do we mean by “extremely expensive?” The additional premium for plans with lower deductibles was so high that no matter how much health care the employees needed, they would still end up paying more for the year if they selected a lower deductible plan. There was no way to benefit from choosing lower deductibles at this company. If people were really savvy insurance customers who understood what they are buying, it is unlikely that many would have picked these types of expensive plans. We found, however, that the majority of employees ended up with these expensive, low-deductible plans. On average, those people could have saved around $350 for the year by having the $1,000 plan instead, and almost none of them would have paid more with the higher deductible.
It’s true that we don’t all face these types of extreme options, yet it’s not uncommon for health plans with lower deductibles to have higher prices relative to higher deductible plans. Our research suggests that people have a hard time spotting whether plans are relatively good or relatively bad deals. We are now working on new ways to present information about health insurance options to make this simpler for people.
In the meantime, what can you do if you are struggling to choose a health plan option? First, ask questions of your benefits office. Second, if you have a choice of plans with different deductibles, try the following simple test: add up the total premium you would pay (your employee share) with each option, and see how different they are. If the difference in premium is close to or above the difference in the deductibles, you should think harder about taking the higher deductible plan.
Finally, if you are choosing a true High Deductible Health Plan (HDHP) that has a health-savings account, make sure you sign up to have the premium savings from choosing that high deductible plan put into your HSA. Then, just remember next year that you shouldn’t avoid valuable care just because you haven’t hit the deductible—the HSA is there so you can pay for the care you need.
Read the full paper, Do Individuals Make Sensible Health Insurance Decisions? Evidence from a Menu with Dominated Options, on the National Bureau of Economic Research website.
Justin Sydnor is Leslie P. Schultz Professorship Fund in Risk Management and Insurance, and associate professor in risk and insurance at the Wisconsin School of Business.