For most individuals, there is choice among many insurance providers and policies. For this system system to work well, providers must be able to set prices that accurately reflect risk and buyers of health insurance must be able to not only understand their health risk, but they must also be able to understand what they are buying. A common belief is that competition (many providers and choices) will increase efficiency and improve outcomes for consumers.
For consumers of health insurance, the choice of health insurance coverage is important, but difficult. Multiple providers with many options for coverage can create an impenetrable knowledge barrier preventing good choices. For providers of health insurance to accurately set prices, they must be able to understand the risk they are assuming. If these conditions are not met, choice can lead to outcomes that are not ideal for providers or for consumers.
Research on these issues is presented below, but the conclusions seem clear.
➢ For providers of insurance, lack of knowledge regarding health risk of buyers creates obvious pricing problems. In addition, current law prevents providers from using some easily identifiable risk factors such as prior health conditions. Providers create standardized plans that have different deductibles, co-pays, and coverage. More favorable characteristics have higher prices, but any consumer, regardless of risk to the provider, may buy the product. It would be rare for the price to accurately reflect risk.
➢ For consumers of health insurance, the problems are often much greater. Consumers are unaware of the likelihood of needing insurance. In addition, the consumers are often unaware of the language of health care and health care insurance and are unable to make informed decisions. Confusion is a common problem, resulting in random choice or choice solely based on an understood, but incomplete factor, such as price.
More choice (competition) does not improve efficiency of the system or improve outcomes for consumers of health insurance.
Research on choice in health insurance reveals these problems.
In “The Questionable Value of Having A Choice of Health Insurance Coverage”, Keith Marzilli Ericson and Justin Sydnor explore these issues.
Under the Affordable Care Act, the average county has 46 plans available across four tiers and five providers. This leads to difficulty in evaluating relative benefits of lower premiums versus lower deductibles. Also, only 14% of people can correctly answer questions about health insurance terms such as deductible, copay, and coinsurance and people were overconfident in their ability to understand these terms. Many people are unable to correctly identify the cost to them of a simple medical procedure. This confusion is true across income and education groups.
Ericson and Sydnor conclude that policy makers and economists should pay more attention to how the complexity on modern health insurance creates confusion for consumers and can erode the benefits of competition.
In “Selection in Health Insurance markets and Its Policy Remedies”, Michael Geruso and Timothy J. Layton look at Adverse Selection.
This occurs when people who think they will be a heavy user select more comprehensive coverage at a higher price and people who believe they will not use health insurance choose less comprehensive coverage at a lower price. Both sets of consumers are often wrong.
Geruso and Layton conclude Adverse Selection is a major problem that inhibits smooth, efficient functioning of competitive health insurance markets. Adverse selection significantly reduces the efficiency of private markets. Insurers are unable to correctly identify risk associated with buyers of insurance.
The authors conclude that to improve operation of the market by reducing risk to providers a reinsurance program that compensates insurance companies after they pay costs could be introduced.
In “Delivering Public Health Insurance Through Private Plan Choice in The United States”, Jonathan Gruber looks at using subsidies to improve consumer choice.
Subsidies will allow consumers to pick a plan to better fit their needs. But this comes with two costs: adverse selection and choice frictions. Adverse selection (see definition above) will tend to make insurance expensive for high risk consumers. Choice frictions refer to significant switching cost as consumers choose among a complicated set of alternatives. Inertia moves us to not switch, regardless of options.
Gruber concludes there is no clear evidence of efficiency gains from choice.
“The Questionable Value of Having a Choice of Health Insurance Coverage”, by Keith Marzilli Ericson and Justin Sydnor; Journal of Economic Perspectives – Vol 31, No 4 – Fall 2017, pp. 51-72.
“Selection in Health Insurance markets and Its Policy Remedies”, by Michael Geruso and Timothy J. Layton; Journal of Economic Perspectives – Vol 31, No 4 – Fall 2017, pp 23-50.
“Delivering Public Health Insurance Through Private Plan Choice in The United States”, by Jonathan Gruber; Journal of Economic Perspectives – Vol 31 No 3 – Fall 2017 pp. 3-22