Health Insurance for "Humans": Information Frictions, Plan Choice, and Consumer Welfare

Abstract

Traditional models of insurance choice are predicated on fully informed and rational consumers protecting themselves from exposure to financial risk. In practice, choosing an insurance plan from a set of complex non-linear contracts is a complicated decision often made without full information on several potentially important dimensions. In this paper we combine new administrative data on health plan choices and claims with unique survey data on consumer information and other typically unobserved preference factors in order to separately identify risk preferences, information frictions, and perceived plan hassle costs. The administrative and survey data are linked at the individual level, allowing in-depth investigations of the links between these micro-foundations in both descriptive and choice-model based analyses. We find that consumers lack information on many important dimensions that they are typically assumed to understand, perceive high plan hassle costs, and make choices that depend on these frictions. Moreover, in the context of an expected utility model, including the additional frictions that we measure has direct implications for risk preference estimates, which are typically assumed to be the only source of persistent unobserved preference heterogeneity in such models. In our setting, we show that incorporating measures of these frictions leads to meaningful reductions in estimated consumer risk aversion. This result has both positive and normative implications since risk aversion generally has different welfare implications than information frictions. We assess the welfare impact of a counterfactual menu design and find that the welfare loss from risk exposure when additional frictions are not taken into account is more than double that when they are, illustrating the potential importance of our analysis for policy decisions.

Consumers’ misunderstanding of health insurance

“…Given the older age of respondents, however, it is unclear whether these and other findings pertaining to Medicare will generalize to younger, likely less cognitively impaired, populations. Another study (Handel and Kolstad, 2013), found that only a minority of workers at a large firm were able to accurately answer questions on benefit design, their own recent health care cost, or other key questions that should, in principal, have been relevant to their choice of health insurance. This lack of understanding was correlated with their insurance choices.…”

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

“…Pauly and Blavin (2008) and Baicker, Mullainathan, and Schwartzstein (2015) summarize evidence that people have a systematic propensity to under-or overuse certain treatments at the margin. For example, Choudhry et al (2011) document that many recent heart attack victims do not adhere to drug Handel and Kolstad (2015b) "Uninformed" consumers leave substantial dollars on table when "over-choosing" generous insurance coverage, relative to "informed" consumers.…”

Estimating Risk Preferences in the Field

“…Going forward, we envision more work emerging in this area, as more field data become available, and researchers are granted ways to design surveys that can reach (a subset of) subjects in the field data (e.g., as in Handel and Kolstad 2015).…”

“…For example, Handel and Kolstad (2015) study the effect of information frictions and hassle costs, measured via a survey administered to individuals for whom health-insurance information is available. The survey elicits individuals' information about available medical providers/treatments and perceived time and hassle costs to learn the characteristics of a high-deductible health-insurance plan (which is cheaper than the other options).…”