Monday, October 5, 2015
People are bad at choosing health plans, part 3
In this, third post on how people are bad choosing health plans, I continue to summarize studies relating to commercial market plans, which I started in my second post. (See post 1 for research pertaining to Medicare plans.)
A study by Saurabh Bhargava, George Loewenstein, and Justin Sydnor examined the choices made by over 50,000 workers at a large U.S. firm among 48 health plans in 2010 and 2011. They found that the majority of them made objectively worse choices than they could have, costing themselves an average of $373 per year, or 42% of the average employee premium contribution. Lower income employees and those with chronic conditions were even more likely to make cost-increasing choices. (And perhaps this lower socioeconomic group are less educated, sophisticated, and unable to diiscern differences in the offerings.
It is true that offerings are nearly identical across the spectrum of plans that are offered. Examiing the Medicare Advantage plans in California between SCAN and Humana the benefits are almost identical, save for the absence of a Part D pharmacy premium (0). They both offer 6 free transportation trips to physician offices.
Apart from cost-sharing and premiums, the 48 plans were identical (e.g., services covered, networks, carrier, manner of presentation in marketing material). Across plans, there were four deductible levels ($1000, $750, $500, $350), three maximum out-of-pocket spending levels ($3000, $2500, $1500), two coinsurance rates (10%/40%, 20%/50% for in/out of network), and two copayment levels ($15/$40, $25/$35 for primary/specialist care). Do the math and that makes 48 possible options (4 × 3 × 2 × 2 = 48).
Because of premium levels, some plans were “dominated” by others, meaning they were objectively worse choices for everyone. For instance, a plan with a $750 deductible cost $500 more in premium than an otherwise identical plan with a $1000 deductible. Trading a guaranteed $500 cost for at most a $250 benefit is an objectively bad deal. (If one’s marginal tax rate is at least 50%, it might not be bad, since premiums are excluded from taxation. The study’s findings hold up even accounting for taxes.) All but one of the 36 lower deductible plans (<$1000 deductible) offered was dominated in this way by a higher deductible plan.