Health and Science

How bad are we at buying health insurance? Very, very bad.


Health insurance isn't rocket science, but buying it may seem just as daunting.

A trio of new reports show that peoples' understanding of health insurance—and what type of plan best suits their medical and financial needs—remains woefully lacking even as the number of choices they face increase.

One of those reports examined plan selections at a company with more than 50,000 workers, and found that even when there was only one financially logical choice out of four basic insurance designs, 65 percent of workers selected the wrong plan.

The poor choices led to $373 per year in unnecessary spending for the average worker making that error, according to a new National Bureau of Economic Research working paper, which did not identify the company. The paper noted there was no difference other than price between the plans—each had the same coverage in and out of network, and same provider offerings.

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The error resulted from workers opting for plans with higher monthly premium payments in exchange for having one of three lowest deductibles, or the total amount they could owe out of pocket for health services: $250, $500 or $750.

The deductibles were lower than what workers ended up paying in extra premium, noted paper co-author Saurabh Bhargava, assistant professor of economics at Carnegie Mellon University. In other words, any savings they might ever realize from having lower deductibles was first eaten up, and then some, by their higher monthly premiums.

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But workers who opted for the highest deductible plan, $1,000, more than recouped that potential cost from the lower premiums they actually paid, Bhargava said.

"Older workers, women and low earners" were particularly likely to chose the lower-deductible plans "resulting in substantial excess spending," the report found.

Surprisingly, the company itself was unaware that it didn't make sense for any of its workers to choose anything other than the high-deductible plan until researchers informed management.

"They were stunned," said Bhargava. The company originally believed it was doing something good for workers when it introduced the option of what became more than 50 different configurations of premiums and out-of-pocket payments employees could design, he said.

Since then, the company has scrapped that system, and now offers a single, high-deductible plan, with a health savings account.

The research suggests that there are deficits in how people understand the basic structure of insurance, which can be exacerbated by having multiple choices.

The problem of choice

But consumers—even those who are otherwise ostensibly financially savvy—can have trouble when there are just two options, or even just one. An example of that was seen at NerdWallet, a San Francisco-based Web company that specializes in educating and "empowering" consumers in their financial choices, including banking, home buying, credit cars and insurance.

Taylor Bernal, a 25-year-old who handles NerdWallet's social media, found this out firsthand. She was originally covered by what was then the company's sole health plan offering, Blue Shield of California, and she visited a walk-in One Medical retail clinic.

"I was having breast pain and my grandmother is a breast cancer survivor," Bernal said. "After a manual exam, the One Medical folks felt it would be important for me to get another look. They told me I was too young for a mammogram, so they ordered that I get an MRI instead."

"I asked the doctor how much he estimated it would cost, and he said it shouldn't be more than a couple hundred dollars," Bernal recalled. "I was referred by them to the St. Mary's Medical Center to get the MRI done. I later received two bills that were over $500—one from the technician who conducted the MRI and another from the doctor who reviewed it. I found that my insurance refused to cover any portion of it, but they would have covered a mammogram instead."

"If I would have known my insurance wouldn't cover the MRI, I probably wouldn't have gotten it done and instead went with another option," Bernal said. "I consider myself to be knowledgeable, working at a personal finance company, and even I got kind of screwed."

Bernal recalled the lack of price transparency, and that unpleasant hit to her wallet, last year, when NerdWallet decided to revamp its benefits to give employees more options for 2015: either a Kaiser Permanente HMO, or health maintenance organization plan, or a PPO, or preferred provider organization plan, from Aetna.

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"We were given speeches by the representative from Kaiser Permanente and a representative from Aetna," said Bernal. "I could just look around and see everybody was confused."

"Our health team recognized that, and said, 'Let's see what we can do,'" Bernal recalled.

Gambling on your health costs

NerdWallet's health team put together a PowerPoint presentation that analyzed and made suggestions based on a set of different scenarios: Healthy and see doctor zero to two times a year; healthy but see specialists; managing a chronic condition; not willing to change doctors; and expecting expensive care.

The presentation laid out deductible amounts and the option of paying extra for enhanced Aetna coverage. It also included suggestions for how much money workers should put into their flexible medical spending accounts. But even with that guidance, "there were so many scenarios, I was a little bit confused," Bernal said. That's despite the fact that NerdWallet pays 100 percent of an employee's monthly premiums.

"Even though we have such great benefits, it was tough for me to choose which one to go with," she said.

After soliciting opinions from friends and family, looking at the PowerPoint and doing her own research, Bernal opted for Kaiser Permanente's HMO plan. She said she was particularly attracted by the plan's transparency for the price of medical services and the fact that that Kaiser's doctors and services were under one roof, "so I didn't have to race around town."

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"I think I made a good choice for myself," she said.

But a number of her co-workers opted for Aetna. In some cases, Bernal said, those people "were brushing aside the economic considerations" in making their own choice.

For one co-worker, "I think she's always had Aetna, so it was a level of comfort," Bernal said. For others, "they were used to having a PPO plan."

Despite believing Kaiser Pemanente made the most financial sense for her, Bernal acknowledged it was based on her best guess for what her health status will be for the year. That, she said, represents a bit of "a gamble," since a health issue could arise that she hadn't anticipated.

But having more health plan options beyond just the two she had to consider last fall "would have been a nightmare," she said. "I can only imagine having more variables would have induced some anxiety."

Worrying more about TVs than doctor's bills

Two other new reports bear that out, and also underscore how consumers often throw up their hands or don't shop smartly when it comes to health insurance.

One comes from Alegeus Technologies, a health-care benefits platform provider which measured the degree to which people acted in a "consumer savvy" manner when shopping for health-care services or providers.

The survey of 5,000 consumers measured how much people were attuned to the cost of such services, and how much they researched and compared their options before making a purchase.

On a scale of 0 to 100, with 100 being the highest level of consumerism, health-care consumers this year scored 48, which was 7 percentage points higher than the same survey last year, according to Alegeus. But even that was much lower than the 79 that people scored when shopping for an electronic item, the 73 they scored when shopping for travel and the 78 scored when buying a car.

Alegeus also found that 45 percent of the consumers did not know how much their health-care costs would be in 2015, and the same percentage of people did not understand what their health insurance plan covers.

The survey further found that two-thirds of the respondents were not confident they are paying the correct amount when they purchase health care.

Despite that confusion, or perhaps because of it, only half of the consumers surveyed by Alegeus claimed they want to play an active role in their health care.

Higher earners know more

Another study, the 2015 Aflac Workforces Report, suggests that workers don't expect health insurance to get any simpler in the future.

"Seventy-one percent of employees at least somewhat agree that their personal health insurance situations will become more confusing as time goes by," according to Aflac, whose survey questioned 3,076 workers across the U.S.

Aflac also found that higher-income workers were much more apt than their lower-wage counterparts to claim to be knowledgeable about elements of consumer-driven health plans—which are where workers play a more active role in spending and saving money on medical services.

For example, 37 percent of high-income workers said they were extremely or very knowledgeable about high-deductible health plans, compared to 19 percent of low-income workers.

High-deductible health plans, which have become increasingly common, require enrollees to directly shoulder a bigger share of the health spending burden in the form of out-of-pocket payments, as opposed to monthly premiums.

High-income workers also tended to be much more confident in their knowledge of health savings accounts and flexible spending accounts, two tax-advantaged ways to save money for medical services, according to the survey.

But "just 10 percent of employees say they understand their total annual health-care costs very or extremely well," Aflac noted. That low level could translate into many people opting for an insurance plan that does not adequately cover their likely health expenses.