Employees need basic guidance in health plan selection

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Does giving employees multiple choices of health plans drive competition and empower them pick plans offering the greatest value and highest quality care –the theory underlying the Affordable Care Act and many employers’ benefit plan designs?

Don’t count on it, concludes an academic study just published by the National Bureau of Economic Research.

The researchers’ findings suggest that employers might not be doing their employees any favors by placing a high priority on employee choice in their health benefit strategies. The study analyzed how 50,000 employees of a very large (and unidentified) U.S. employer went about the business of choosing a health plan. 

“The recent expansion of health-plan choice has been touted as increasing competition and enabling people to choose plans that fit their needs,” according to authors Saurabh Bhargava and George Loewenstein of Carnegie Mellon University, and Justin Sydnor of the University of Wisconsin.

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In the study, “Do Individuals Make Sensible Health Insurance Decisions?”, the researchers say they “provide new evidence challenging these proposed benefits of expanded health-insurance choice.”

Employees had options for four “cost-sharing dimensions”—deductible, out-of-pocket maximums, copay and coinsurance. “The resulting ‘build-your-own menu featured 48 plans which varied in cost sharing and premium, but were otherwise equivalent,” according to the study.

No bargain

Employees typically chose what the authors call a “financially dominated” plan. An example of such plans given by the authors is a plan offering four deductible options: $1,000, $750, $500, and $250. Employees “typically” had to pay $500 more in premium, to reduce their deductible by from $1,000 to $750. That means that employees failed to realize that they were “buying” a lower deductible with worth $250 for $500 – twice its value.

The way the study was designed, the result was seen in various ways, eliminating the possibility that some other consideration was at play. “The economic consequences of these poor choices for those who made them were significant,” the authors stated. “The average employee opting into a dominated plan could have saved $373 per year by choosing an otherwise equivalent plan with a higher deductible.”

The study also revealed a demographic pattern to the “poor quality” choices: “Lower-income employees, female employees, older employees, and employees with chronic health conditions were all significantly more likely to select dominated contracts,” the study revealed.

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However, many employees deemed as “sophisticated” also made what appear to be financially irrational choices. Why? One possibility “is that sophisticated employees knowingly pay a premium for the ease and predictability of incurring steady payroll deductions, as compared to a more variable flow of out-of-pocket expenses,” the authors surmised.

The researchers probed further, and found that most employees “do not anticipate that plan menus might include plans of low financial value.” And efforts to explain the financial consequences of those choices “led to very little choice improvement.”

“Most lacked definitional and conceptual understanding of insurance concepts such as a deductible and copayment, and these deficits in insurance literacy predicted poor plan choices,” the study found.

If employers continue to give employees a broad array of plan choices instead of simply limiting them to a “single, actuarially best plan,” employees can benefit from “real-time decision-aids designed to educate” employees. When they did so, the researchers observed “significant improvements in choice quality.”

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