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The Congressional Budget Office estimates that 20 million Americans will choose health coverage on the insurance exchanges created by the Affordable Care Act. Those marketplaces opened Oct. 1, and while technical difficulties have been an obstacle so far, there’s also concern about consumers’ ability to choose a cost-effective insurance plan.

A study from Columbia Business School suggests that more than half of consumers will not choose the most cost-effective plan available to them.

The research involved six experiments in which consumers were asked to choose the most cost-effective plan based on estimated doctor visits and varying prices among plan premiums, co-payments and deductibles.

When presented with this information, consumers chose the most cost-effective option only 32% of the time with plans they chose averaging $611 of added cost. The consumers’ failure to pick the most cost-effective plan may reflect a difficulty in calculating potential costs.

How People Decide

Researchers identified another possible reason for the decisions. While subjects were required to pass a comprehension test covering health insurance terms, they may have based their decisions on the costs of co-payments, premiums and deductibles.

“According to economic theory, these costs should be approximately equally weighted since they all occur over the course of a year, and all contribute to the annual cost of the policy,” the report says. “However, past research has indicated that some costs (usually deductibles) are overweighted while others, like premiums, are underweighted.”

Participants in this research appear to have done exactly that, giving more weight to out-of-pocket costs and deductibles in their decisions.

Even when people had access to price calculators (which some insurance websites provide) consumers picked the most cost-effective plan only 47% of the time, costing an extra $364, on average. A news release about the study elaborated on the impact of these costs:

“Consumers’ failure to identify the most appropriate plan has considerable consequences on both their pocketbooks as well as the cost of the overall system,” said Eric Johnson, co-author of the report and co-director of Columbia Business School’s Center for Decision Sciences. “If consumers can’t identify the most cost-efficient plan for their needs, the exchanges will fail to produce competitive pressures on health care providers and bring down costs across the board, one of the main advantages of relying upon choice and markets.”

Tools That Make a Difference

One experiment cited in the study used Columbia MBA students enrolled in a personal finance class, and they chose the most cost-efficient plans 73% of the time. Their choices added an average $126 to the cost of coverage. This experiment gave the subjects access to a price calculator, suggesting the importance of both knowledge and the ability to calculate potential costs.

In another experiment, consumers were presented with a tutorial about calculating annual costs and a quiz testing their abilities to do so. Some consumers were given calculators, and some used “smart defaults,” which selected the most cost-effective option based on the consumer’s use of health care. Subjects were allowed to change the default plan, and several did.

But when given access to both the calculator and the smart-default process, consumers’ decision-making matched that of the MBA students.

The idea of the experiment was to show how the exchanges could be designed to help consumers make the most cost-effective decisions when choosing health plans, and the conclusion of the report offered several suggestions for accomplishing that.

Given the current structure of health plan information — whether presented through an online marketplace or by an employer — insurance customers need to take the time to educate themselves about health insurance costs and their impact on consumers’ overall financial pictures.

Image: iStock

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