Ubel: Health insurers profit form people’s poor choices
The “moderates” in the Democratic presidential primary hope to build on the Affordable Care Act, rather than make the more dramatic shift to “Medicare for All” — and even Sen. Elizabeth Warren of Massachusetts has changed course to embrace a plan that would move to Medicare for All more slowly. But if they want to build on the Affordable Care Act, they need to confront a serious perversity of the private insurance system underlying it: The system’s financial health depends on people choosing the wrong plans.
A central goal of health care restructuring ought to be radically simplifying insurance choices, so people don’t mistakenly choose plans that cost them thousands of dollars more than necessary each year.
Multiple studies demonstrate that despite the high stakes — financial and medical — many people make objectively poor health insurance decisions. In one study from 2015, three behavioral economists analyzed insurance choices of 50,000 workers at a Fortune 500 company that offered its employees a menu of health plan options: The workers could mix and match such features as deductibles, co-pays and out-of-pocket maximum payments, with the result that 48 distinct plans were possible. More than half of these employees ended up choosing plans that were objectively worse than alternatives. They chose to pay $500 more in premiums, say, to reduce their deductible by $250. As a result of misguided choices, the average person utterly unnecessarily spent the equivalent of 2% of their salary — and low-income, female, older and chronically ill patients spent even more.
Similarly, in 2015, a pair of Massachusetts Institute of Technology economists analyzed the insurance choices of millions of people deciding on Medicare plans to cover medication expenses. Medicare’s Part D offers basic drug coverage through private plans that offer a range of premiums, co-pays and so on. Again, there are sometimes objectively correct decisions in these cases: People who take specific medications should choose plans that generously cover those treatments. In this case, however, only 12% of people chose the best plans for their circumstances, and the average person spent 24% more on medicines than they would have spent under an alternative available plan.
To understand why the financial viability of the Affordable Care Act’s insurance plans rely on bad choices, imagine what would happen if everyone made good ones. Consider two plans that an insurer might offer on an exchange. One is a low monthly premium plan with high deductibles, the other a higher-premium plan with low deductibles. All else being equal, people with expensive chronic illnesses ought to choose the low-deductible plan, paying more each month on premiums to avoid high out-of-pocket expenses for medical care they know they’ll need. By contrast, relatively healthy people ought to gravitate toward the first plan, saving money each month while taking a calculated risk that they never get sick enough to be responsible for the full cost of their deductible.
However, if a high-premium, high-deductible plan attracts an increasing number of people with expensive chronic conditions, the insurance company will be forced to raise monthly premiums so that the plan will survive financially. That will cause even more relatively healthy people to shift toward the high-deductible plan. The result will be another round of premium hikes for the low-deductible plan and further flight of healthy consumers.