Study: Consumers do not understand health insurance, cast doubt on best decisions under ACA

Published on August 2, 2013 at 5:58 AM · No Comments

This fall, as part of the 2010 Affordable Care Act (ACA), Americans will have a greater range of health care insurance options to choose from, including, for many, state-based plans. But will they make the right decisions? That's doubtful, according to a new study led by Carnegie Mellon University's George Loewenstein.

Previous research has shown that competition at the consumer level is only likely to result in reduced prices and improved quality when sufficient numbers of consumers make informed decisions. The study led by Loewenstein shows that consumers do not understand health insurance and therefore casts doubt on whether they will make the best decisions under the ACA.

Published in the Journal of Health Economics, the researchers report findings from two surveys of representative samples of Americans between the ages of 25 and 64 who have private health insurance and are the primary or shared decision maker for their own or their families' health care. Behavioral economists at the University of Pennsylvania, Stanford, Harvard and Yale universities and the University of Chicago, as well as professionals at a health insurance company participated in the research.

The first survey was designed, in part, to uncover how well the insurance holders understand four basic traditional health insurance concepts - deductible, copay, co-insurance and out-of-pocket maximum - as well as how well they believe they understand them. Analysis of responses revealed that while insured Americans felt confident about their own understanding of these concepts, their actual understanding was much lower; only 14 percent of all respondents accurately understood all four concepts.

The first survey also found that only 11 percent of respondents presented with a traditional insurance plan incorporating all four of these elements were able to compute the cost of a four-day hospital stay when given the information that should have enabled them to do so. Finally, the survey revealed that a simplified insurance plan that eliminated deductibles and copays - the two least well understood elements of insurance plan design - would appeal to consumers.

"It is strange, in my opinion, that the insurance market has evolved so, that so few individuals understand the fundamentals of the medical insurance plans they are insured under," said Loewenstein, the Herbert A. Simon University Professor of Economics and Psychology in CMU's Dietrich College of Humanities and Social Sciences. "Insurance plans incorporate all sorts of incentives designed to encourage customers to make specific types of decisions. What is the likelihood that they are going to respond to these incentives if they can't understand the most basic elements of plan design?"

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