Economics Research Seminar
Do Individuals Make Sensible (Health) Insurance Decisions? Evidence from a Menu with Dominated
Sponsored by: Economics Department
Speaker(s): Saurabh Bhargava, Ph.D., Carnegie Mellon University
Date & Time: Wednesday, March 25, 2015 from 3 p.m. to 4:30 p.m.
The economic rationale for recent expansion in health plan choice presumes that individuals are able to sensibly choose from available options. We test this presumption by assessing the quality of over 50,000 health insurance decisions from a U.S. firm which permitted employees to “build” their own plans from a standardized menu of 48 plan options of which a large share were financially dominated. The menu offers a unique litmus test for evaluating choice in that no set of standard risk preferences or beliefs regarding future health can rationalize enrollment into dominated plans. We find that a majority of employees choose dominated options, resulting in excess spending equivalent to an average of 42% of the annual plan premium. Employees fail to improve plan choice over time, and older workers, women, and low earners were disproportionately likely to make costly errors in choice. We then report findings from follow-up hypothetical choice experiments which suggest that while search complexities may have modestly contributed to poor choice, such choices are more fundamentally due to a lack of understanding of basic health insurance concepts. We find that plan selection is ultimately consistent with a heuristic choice strategy whereby individuals sort into available plans based on crude self-assessments of health and the configuration of plan menus rather than a careful evaluation of the financial value of plan options. Our results challenge the standard practice of inferring risk attitudes and from insurance choices and raise doubts as to whether recent reform will deliver on its promised benefits.
Please join the Economics Department for a research seminar. This event is open to all Case Western Reserve University faculty, Ph.D. students, economic majors and minors, and those interested in economics research.
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