Health Insurance Plan Choice and Switching
- Joachim WinterJoachim WinterDepartment of Economics, Ludwig Maximilian University of Munich
- and Amelie WuppermannAmelie WuppermannDepartment of Economics, Ludwig Maximilian University of Munich
Choice of health insurance plans has become a key element of many healthcare systems around the world along with a general expansion of patient choice under the label of “Consumer-Directed Healthcare.” Allowing consumers to choose their insurance plan was commonly associated with the aim of enhancing competition between insurers and thus to contribute to the efficient delivery of healthcare. However, the evidence is accruing that consumers have difficulties in making health insurance decisions in their best interest. For example, many consumers choose plans with which they spend more in terms of premiums and out-of-pocket costs than in other available options. This has consequences for the individual consumer’s budget as well as for the functioning of the insurance market.
The literature puts forward several possible reasons for consumers’ difficulties in making health insurance choices in their best interest. First, consumers may not have a sufficient level of knowledge of insurance products; for example, they might not understand insurance terminology. Second, the environment or architecture in which consumers make their decision may be too complicated. Health insurance products vary in a large number of features that consumers have to evaluate when comparing options, introducing search or hassle costs. Third, consumers may be prone to psychological biases and employ decision-making heuristics that impede good choices. For example, they might choose the plan with the cheapest premium, ignoring other important plan features that determine total cost, such as copayments. There is also evidence that consumer education programs, simplification of the choice environment, or introducing nudges such as setting smart defaults facilitate consumer decision making.
Despite recent progress in our understanding of consumer choices in health insurance markets, important challenges remain. Evidence-based healthcare policy should be based on an evaluation of whether different interventions aimed at facilitating consumer choices result in welfare improvements. Ultimately, this requires measuring consumer utility, an issue that is vividly debated in the literature. Furthermore, welfare calculations necessitate an understanding of how interventions will affect the supply of health insurance, including supply reactions to changes in demand. This depends on the specific regulatory setting and characteristics of the specific market.