Choose to Lose: Health Plan Choices from a Menu with Dominated Option*

Abstract

We examine the health plan choices that 23,894 employees at a U.S. firm made from a large menu of options that differed only in financial cost-sharing and premium. These decisions provide a clear test of the predictions of the standard economic model of insurance choice in the absence of choice frictions because plans were priced so that nearly every plan with a lower deductible was financially dominated by an otherwise identical plan with a high deductible. We document that the majority of employees chose dominated plans, which resulted in excess spending equivalent to 24% of chosen plan premiums. Low-income employees were significantly more likely to choose dominated plans, and most employees did not switch into more financially efficient plans in the subsequent year. We show that the choice of dominated plans cannot be rationalized by standard risk preference or any expectations about health risk. Testing alternative explanations with a series of hypothetical-choice experiments, we find that the popularity of dominated plans was not primarily driven by the size and complexity of the plan menu, nor informed preferences for avoiding high deductibles, but by employees’ lack of understanding of health insurance. Our findings challenge the standard practice of inferring risk preferences from insurance choices and raise doubts about the welfare benefits of health reforms that expand consumer choice.

Frictions or Mental Gaps: What's Behind the Information We (Don't) Use and When Do We Care?

“…Bhargava, Loewenstein, and Sydnor (2017) In active choices, consumers frequently choose dominated plans from menu of 48 insurance options at large employer, losing $300-$400 on average.…”

“…Bhargava, Loewenstein, and Sydnor (2017) explore the quality of individuals' health insurance decisions, and reasons for what appear to be mistakes, by analyzing data from an employer where employees choose from large menus of insurance plan options. They find that a majority of employees choose health insurance plans that are financially dominated: For example, an employee might pay $500 more in annual premiums to reduce the deductible from $1,000 to $750.…”

“…For example, people may choose a health insurance plan that costs $500 per year more in premiums in order to obtain a deductible that is $250 lower-despite having access to open enrollment booklets containing relevant information (Handel 2013;Bhargava, Loewenstein, and Sydnor 2017). People buy branded drugs over equivalent but less-expensive generics (Bronnenberg, Dubé, Gentzkow, and Shapiro 2015) even though information printed on the package reveals their equivalence.…”

Estimating Risk Preferences in the Field

“…Indeed, Bhargava, Loewenstein, and Sydnor (2017) find evidence of large numbers of employees at one company choosing health-insurance plans that are dominated by other available options.…”

Doing Less With More

“…Indeed, some evidence from the behavioral economics literature suggests that the notion of more opportunities being better may not always hold. As the size of the choice set increases, people begin selecting simpler, less complicated options [Iyengar and Kamenica, 2010], make dominated choices [Bhargava et al, 2017], and sometimes prefer to avoid making a choice altogether [Iyengar and Lepper, 2000].…”