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We report results from two surveys of representative samples of Americans with private health insurance. The first examines how well Americans understand, and believe they understand, traditional health insurance coverage. The second examines whether those insured under a simplified all-copay insurance plan will be more likely to engage in cost-reducing behaviors relative to those insured under a traditional plan with deductibles and coinsurance, and measures consumer preferences between the two plans. The surveys provide strong evidence that consumers do not understand traditional plans and would better understand a simplified plan, but weaker evidence that a simplified plan would have strong appeal to consumers or change their healthcare choices.

Beginning in Fall 2013, as part of the 2010 Affordable Care Act (ACA), the Federal government and the minority of states who have opted to do so will begin open enrollment for a new set of ‘affordable insurance exchanges’. The website Health Care.gov describes an affordable insurance exchange as a “new transparent and competitive insurance marketplace where individuals and small businesses can buy affordable and qualified health benefit plans.” The linking of the words “competitive” and “affordable” in the description reflects the stated intention of the designers of the ACA that competition between insurance companies will lower prices while maintaining quality. In thinking about competition in the insurance market, one can distinguish between two levels at which it occurs. At a higher level, insurers compete with one another to attract business from employers (or possibly exchanges) – i.e., to include their plans among those offered to employees (or exchange subscribers). At a lower level, once a plan has been selected for inclusion by an employer or exchange, insurers will compete to attract subscribers to their plan as opposed to other plans being offered. Although our main focus in this paper is at the lower level – on employees understanding of, attitudes toward, and behaviors contingent upon different insurance plans – ideally competition at both of these levels will have beneficial effects on price and quality. Competition at the consumer level, however, is only likely to result in reduced prices and improved quality when sufficient numbers of consumers make informed decisions. As Gabaix and Laibson (2006) show (see, more recently, Heidhues et al., 2012a and Heidhues et al., 2012b), competition can fail to eliminate biases in markets if there exists a core of consumers who make systematic errors in choosing between products. Given a significant core of naïve consumers, they show, a market equilibrium can arise in which naïve consumers pay prices substantially above marginal cost, and effectively subsidize sophisticated consumers who are able to exploit the mispricing. In the domain of insurance, for example, the existence of a substantial core of consumers who are disproportionately attracted to low deductible policies (see, e.g., Barseghyan et al., 2013 and Sydnor, 2010) can enhance insurer's profits at the expense of those opting for low deductibles, while those who opt for high deductibles escape to fairly priced plans.

Our analysis of the results from the two surveys highlights a number of benefits of a simplified insurance plan design. The comprehension study shows that people have a limited understanding of traditional health insurance. Only 14% of the sample was able to answer correctly 4 multiple choice questions about the four basic components of traditional health insurance design: deductibles, copays, coinsurance and maximum out of pocket costs (‘MOOP’). Similarly, many respondents were unable to calculate the cost of basic services covered by the traditional insurance plan. Most strikingly, only 11% were able to correctly answer a fill-in-the-blank question about the cost of a hospitalization. Second, respondents reported that they would be somewhat more likely to engage in some cost-reducing behaviors – specifically, going to urgent care instead of the ER, and contacting their doctor to ask for a generic drug – if they were covered by a simplified insurance plan than if they were covered by a traditional plan. One explanation for why we don’t find a striking difference in choices between the traditional and simplified plan may stem in part from the fact that people are already aware that traditional plans incorporate incentives for seeing in-network providers, avoiding the emergency room, and taking generic drugs, even if they can’t quantify the consequences of choosing one option over the other. Indeed, the fear induced by such ambiguity – that the more expensive options may be much more expensive – may be an even more potent motivator than the knowledge of actual cost-differences that the simplified plan makes it so much easier to assess. In sum, these results suggest that simplification is likely to have a substantial effect on individuals’ understanding of their own insurance policies, but raises questions about the magnitude of the effect such an increment in understanding is likely to have on healthcare choices. Third, respondents preferred the simplified health insurance plan when it was described in general terms (in the comprehension study) and presented in detail (in the choice study). In the choice study, however, the strong preference for the simplified plan emerged only after attempted to compute the cost of a single service, contingent on being insured under each plan. Moreover, based in part on responses to the open-ended question about why they preferred the plan they expressed a preference for, it seems that some respondents were put off by the high prices of services that the simplified plan made it easier to perceive. This points to a potential pitfall or marketing a simplified plan; people may prefer the devil they don’t know in this context. Perhaps as a result of optimism bias or a dislike for being confronted by painful information, consumers may be attracted by the traditional plan's shrouding of the prices they will have to pay should they require various medical services. Inevitably, the research has limitations. Respondents may not have been very motivated to answer the comprehension questions correctly, since they were not incentivized to do so. More seriously, the choices respondents made in the choice survey were hypothetical, and may not well represent how respondents would behave if confronted with similar, real, choices. On the one hand, the quality of the information they received was probably as good as most insured individuals face when they are making healthcare decisions, and the predominant multiple choice questions in the survey may have made it easy for respondents to guess the correct answer, so the results may overstate both the impact of the insurance policy on medical choices as well as on ability to estimate costs. On the other hand, the hypothetical nature of the choices, and the lack of incentives for responding correctly, may have decreased respondents’ attentions to details, which could have attenuated differences between the surveys that might be greater in the real world. In addition, some of the factors incorporated in the scenarios, such as recommendations from friends, the convenience of a doctor who is geographically closer, and the stressfulness of contacting a doctor to change a prescription, seem likely to have a greater impact in reality than in hypothetical choice, although this is not so important for understanding the impact of the insurance policies since these factors were held constant between the two versions of the survey. Although simplified insurance might help consumers make better choices between policies, and perhaps better healthcare decisions given the policies they end up selecting, the overall impact of simplification is likely to be more subtle and complex because employers are unlikely to be a static part of the equation. Prior research on automatic enrollment in retirement plans found that it led workers to save more, but also led employers to cut back on the match rate so as to maintain the same approximate payout (Soto and Butrica, 2013 and Butrica and Karamcheva, 2012). Thus, the main net effect was to redistribute wealth from more affluent workers to poorer workers who hadn’t been saving previously or receiving the match (arguably a good thing), but decreasing the match, as well as the savings rates, for more affluent workers. The impact of health insurance will therefore depend not only on the responses of different groups of workers, but also those of employers. The impact of simplification is also likely to depend on the specific form that simplification takes. Almost surely, the single largest mistake that most insurance purchasers make is to purchase policies with overly low deductibles (Sydnor, 2010). Indeed, such mistakes are so severe that in some cases they violate dominance – e.g., when someone pays more than $250 to drop the deductible on a medical insurance policy by less than $250. Based on this finding alone, it might seem that lowering deductibles to zero would be lead to even more suboptimal choices, but this is not necessarily a correct inference. If copayments are raised as deductibles are dropped, this could decrease moral hazard – one of the factors that raises the cost of low deductible policies. In addition, if all workers faced the same zero deductible, this would eliminate adverse selection, at least on deductibles, which is a major contributing factor to the low pricing of high deductible policies. If making choices simpler makes it easier for consumers to find good matches in coverage, however, is unlikely to help, and might even have adverse effects, when it comes to the other aspects of adverse selection. For example, better decision making on the part of consumers could lead to a greater concentration of unhealthy consumers in high cost, high benefit, plans, which would tend to raise the costs, and prices, for such plans, and, as a result, to reduce risk-sharing between healthier and sicker individuals. Giving people choices between insurance options they understand is almost certainly a good thing; it is, arguably, inherently desirable for people to make healthcare decisions with a reasonable understanding of what different options will cost. Yet, as the prior discussion suggests, knowing exactly who will benefit or be hurt by simplification is not at all easy to predict. Like most policies, therefore, it would be best to examine the consequences of insurance simplification beginning with small scale field experiments. While recognizing the potential problem of insurance complexity, the ACA adopts a somewhat superficial approach to dealing with it that revolves around the standardization and simplified presentation of information about insurance plan features. However, 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. In this paper, we have shown that it is possible to develop a cost-neutral simplified insurance product that is appealing to consumers. Hopefully, the market will recognize, and meet, the need for such products.