The Questionable Value of Having a Choice of Levels of Health Insurance Coverage

Abstract

In most health insurance markets in the United States, consumers have substantial choice about their health insurance plan. However additional choice is not an unmixed blessing as it creates challenges related to both consumer confusion and adverse selection. There is mounting evidence that many people have difficulty understanding the value of insurance coverage, like evaluating the relative benefits of lower premiums versus lower deductibles. Also, in most US health insurance markets, people cannot be charged different prices for insurance based on their individual level of health risk. This creates the potential for well-known problems of adverse selection because people will often base the level of health insurance coverage they choose partly on their health status. In this essay, we examine how the forces of consumer confusion and adverse selection interact with each other and with market institutions to affect how valuable it is to have multiple levels of health insurance coverage available in the market.

Impact of Consequence Information on Insurance Choice

“…1 Consumers' poor understanding of insurance products are a likely driver of some of these patterns (Johnson et al, 2013;Loewenstein et al, 2013;Bhargava et al, 2017b;Handel et al, 2020). These challenges with understanding insurance call into question the value of expanding individuals' choice sets in insurance markets, which has been especially common in many health insurance markets (Ericson and Sydnor, 2017).…”

An Ounce of Prevention

“…In principle, one could weight persons according to a measure of social welfare (Saez and Stantcheva 2016), but this is usually not done in practice. The public health literature often rationalizes the use of equal weights on equity grounds, but one can also appeal to the extensive literature that questions the normative meaning of observed demand curves, much of which uses health care choices under uncertainty as examples (Handel and Kolstad 2015;Bhargava, Loewenstein, and Sydnor 2017;Ericson and Sydnor 2017;Handel and Schwartzstein 2018).…”

Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design

“…Finally, even when choice data is available, the traditional focus of the literature has been on adverse selection, both in HI and LTCI. In the context of HI, a rapidly growing literature documents the importance of choice frictions distorting plan choices (see Ericson and Sydnor 2017;Chandra et al 2019) and a recent literature has started analyzing the role of selection on moral hazard (e.g., Einav et al 2013, Shepard 2016. Still relatively little is known about the importance of heterogeneity in the preferences underlying choices, even though offering choice only has value when there is significant heterogeneity in valuations that is uncorrelated with people's risk and choice frictions (e.g., Handel and Kolstad 2015;Handel et al 2019).…”