A recent study suggests that consumers are overconfident with how well they understand four basic traditional health insurance terms and would better understand a simplified health care plan.
“Despite frequent lamentations about Americans’ poor understanding of health insurance, there is only limited empirical research addressing the issue,” the researcher wrote. “A recent posting on the website of Consumers Union lamented that ‘the field of health literacy, while quite robust in other ways, does not precisely measure consumers’ ability to understand and use health insurance.’ The same posting notes that a comprehensive survey of health literacy research includes not a single study that investigates consumers’ ability to understand and use health insurance. We address this gap in existing empirical research by reporting results from two different surveys designed to address the two issues raised by Consumer’s Union: consumers’ ability to understand and use health insurance.”
The researchers administered a comprehensive survey, to assess how well Americans understand four basic traditional health insurance terms: deductible, copay, co-insurance and out-of-pocket maximum, as well as how well they believe they understand it; and a choice survey that used a simplified insurance plan using only copays and no deductibles to address consumers’ ability to use information about health insurance and whether they might make better decisions if they understood their insurance plan more thoroughly.
The comprehension survey was administered to a representative sample of 202 Americans in January and February 2012. Overall, survey results showed that individuals were highly confident about their own understanding of copays, deductibles and maximum out-of-pocket costs, but were less confident about their understanding of coinsurance. However, the number of correct responses on multiple choice questions about these concepts revealed a lower understanding than was perceived, ranging from a high of 78% for deductibles to a low of 34% for coinsurance. Researchers found that older respondents answered fewer questions correctly vs. college educated and above-median income respondents who answered more concept questions correctly. Survey results showed that having more experience with the health care system did not have a significant effect on the number of questions answered correctly. In fact, only 14% of all participants accurately understood all four concepts.
Results from the comprehension survey also showed only 11% of participants were able to compute the cost of a 4-day hospital stay with a traditional insurance plan, even when provided with the information that would allow them to do so.
When researchers asked respondents for their preference between a simplified health care plan that eliminated deductibles and copays and traditional healthcare plan, respondents exhibited a strong preference for the simplified plan, but were less positive about the simplified plan when it included copay fees that were 50% higher.
“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,” George Loewenstein, PhD, the Herbert A. Simon University Professor of Economics and Psychology at Carnegie Mellon University, stated in a press release. “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?”
In the choice survey, 413 respondents were randomly assigned to answer questions about different health insurance in one of two orders. First, half of the participants were assigned to make hypothetical health care choices imagining they had the same traditional plan that had been shown to respondents in the comprehension survey. Participants were then asked to make the same decisions again, but this time assuming they had a simplified plan. The other half of respondents made the same decisions in reverse order.
When faced with a higher vs. lower cost treatment choice, respondents were more likely to make the lower cost choice if they had the simple plan, but relative to the traditional plan, the difference was not statistically significant. Regarding a hypothetical hospital stay, respondents showed a slight preference for the simple health care plan before computing the cost of the service, and a strong belief that the simple plan was easier to understand. After attempting the cost calculations, respondents preferred the simplified plan more strongly.
Although participants with a higher education were more likely to answer questions about either the simple or traditional plan correctly, researchers found participants were more likely to answer the questions about the simple health care plan correctly compared with the traditional plan regardless of education.
“Giving people choices between insurance options they understand is almost certainly a good thing; it is, arguably, inherently desirable for people to make health care decisions with a reasonable understanding of what different options will cost,” the researchers concluded. “Yet … knowing exactly who will benefit or be hurt by simplification is not at all easy to predict. Presenting simplified information about something that is inherently complex introduces a risk of ‘smoothing over’ real complexities, in effect burying them in the now not-so-fine print. Rather than trying to explain inherently complex insurance plans in simple terms, therefore, a more fundamental approach would be to (1) design health insurance products that are truly simple, and (2) require plans to offer identical features that can be directly compared.”
A lesson for consumers
With the implementation of the Affordable Care Act (ACA), 45 million uninsured people will have to choose a health plan for the first time. As one of the larger elements of personal expenses, it is important that consumers choose the right plan with the right incentive structure to promote their health and well being.
According to Barbara McGill, of the Cochester Consulting Group, for consumers to choose the right health insurance plan it is important for consumers to look up and understand terms they are unfamiliar with, such as copay, co-insurance, deductible and out-of-pocket maximum. Next, consumers should know how much they spend in medical expenses to know which plan is the best for them.
“Under the health exchanges mandated by the ACA, the government is trying to make it easier for people to buy health insurance, but the terminology is complex and people don’t understand the most common features of even the most common plans,” McGill told O&P Business News. “If they don’t understand it, how will they choose the right plan? How will they make the right medical choices if they don’t know what services will cost them? That’s why we did the research, first to show how few people actually understand how their plans pay, and then, to test whether they would make different health choices if they actually understood the potential costs. We learned that a simplified plan could increase understanding, but we don’t yet know if it would impact health care decisions.” — by Casey Tingle
Disclosure: This work was sponsored by a research grant from Humana.