The Social Determinants of Choice Quality: Evidence from Health Insurance in the Netherlands

Abstract

Market provision of impure public goods such as insurance, retirement savings and education is common and growing as policy makers seek to offer more choice and gain efficiencies. This approach induces an important trade-off between improved surplus from matching individuals to products and misallocation due to well documented choice errors in these markets. We study this trade-off in the health insurance market in the Netherlands, with a specific focus on misallocation and inequality. We characterize choice quality as a function of predicted health risk and leverage rich administrative data to study how it depends on individual human capital, socioeconomic status and social and information networks. We find that choice quality is low on average, with many people foregoing options that deliver substantive value. We also find a strong choice quality gradient with respect to key socioeconomic variables. Individuals with higher education levels and more analytic degrees or professions make markedly better decisions. Social influence on choices further increases inequality in decision making. Using panel variation in exposure to peers we find strong within firm, location and family impacts on choice quality. Finally, we use our estimates to model the consumer surplus effects of different counterfactual scenarios. While smart default policies could improve welfare substantially, including the choice of a high-deductible option delivers little welfare gain, especially for low-income individuals who make lower quality choices and are in worse health.

Impact of Consequence Information on Insurance Choice

“…Many recent studies have documented patterns of sub-optimal insurance choices that are difficult to reconcile with standard economic theories of insurance demand. 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).…”

“…In two separate experiments, we present subjects with menus of plan options and vary whether we provide only feature-based information or include a graphical mapping of features to financial consequences. To assure that all subjects in our studies have common beliefs, subjects in all groups 1 See for example: (Frank and Lamiraud, 2009), (Heiss et al, 2010), (Sydnor, 2010), (Abaluck and Gruber, 2011), (Schram and Sonnemans, 2011), (Sinaiko and Hirth, 2011), (Ericson and Starc, 2012), (Kling et al, 2012), (Zhou and Zhang, 2012), (Handel, 2013), (Johnson et al, 2013), (Loewenstein et al, 2013), (Atanasov and Baker, 2014), (Marzilli Ericson, 2014), (Handel and Kolstad, 2015), (Bhargava et al, 2017a), (Bhargava et al, 2017b), (Handel et al, 2020) first see a distribution of medical spending possibilities. Hence, in theory, no new information is contained in the consequence information decision aid.…”

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

“…An ongoing challenge is to separate preference heterogeneity from choice frictions when using Revealed Preference methods (e.g., Handel and Kolstad 2015). A final dimension on which we know too little in basically all insurance contexts is how the dimensions of choice relate to income, which will be crucial to evaluate the equity implications of embedding choice in social insurance design (e.g., Handel et al 2020). Notes: This figure illustrates the methodology of Hendren (2013) and Hendren (2017) to identify adverse selection in the absence of choice data using elicited risk beliefs.…”

“…m Some evidence that limited awareness and risk misperceptions are responsible for reduced demand for long-term care insurance (Cramer and Jensen 2006;Zhou-Richter et al 2010;Boyer et al 2017). n There exists substantial evidence of choice frictions in the context of health care insurance (see Abaluck and Gruber 2011;Handel 2013;Heiss et al 2013;Loewenstein et al 2013;Marzilli Ericson 2014;Polyakova 2016;Ho et al 2017;Handel and Kolstad 2015;Bhargava et al 2017;Wright et al 2017;Handel et al 2020).…”

Consumer Salience and Quality Provision in (Un)Regulated Public Service Markets

“…Such services are characterised by asymmetric information between the service provider and the customer (see Dulleck and Kerschbamer, 2006, for an overview). See, for example, Borghans et al (2015) for evidence of how experts improve educational choices and Handel et al (2020) for factors affecting choice qualities in health insurance markets.…”