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Health Plans Baffling

A new Carnegie Mellon-led study found that simplifying insurance systems helps people make better choices, without hurting care. Go figure.
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This fall many Americans will find themselves with a larger range of insurance options, a result of the 2010 Affordable Care Act, a.k.a. "Obamacare." So, are you ready to make wise health insurance choices, and perhaps some changes to your health plan, under the new system? Probably not, a gaggle of health economists have found.

When the massively complex U.S. health care system is explained clearly to consumers, the odds of them making good choices about their medical care goes up.

Publishing under the admirably clear summary "Consumers Don't Understand Health Insurance," the study released today was based on two surveys of health care consumers who were presented with four common insurance plans: copay, deductible, out-of-pocket maximum, and co-insurance. They asked the consumers how they felt about their ability to parse the pros and cons of each model. The response wasn't encouraging. "Analysis of responses revealed that while insured Americans felt confident about their own understanding of these concepts," the report noted, "their actual understanding was much lower; only 14 percent of all respondents accurately understood all four concepts."

Now, the problem here is that the health economists (a collection of gaudy-sounding minds from Carnegie Mellon as well as Penn, Harvard, and Yale, joined by some insurance industry professionals) also found that the Obamacare reforms would likely succeed in bringing down health care costs and increasing the quality of the care Americans receive from their doctors, but only if people understand their choices well enough to have the appropriate plan for their needs. Meaning, the scheme might work, but before fall, we need about 85 percent of Americans to be at least minimally schooled in the difference between "co-pay" and "deductible" models.

The research also suggested that various financial incentives built into insurance plans tend to escape consumers' consideration because they aren't explained well. That suggests many cleverly market-based attempts to steer consumers toward one or another insurance option likely fall on deaf ears, because you have to be an insurance economist to understand what you're reading.

The solution, the researchers found—sit down for this—was to make the plans simpler and easier to understand. In the second part of the study, the researchers carried out another survey, presenting simplified health plans to model consumers and asking them to pick a plan for themselves. Confronted with more intuitive, less complex, better-summarized options, people started making better choices.

Analysis of survey responses revealed that respondents were somewhat more likely to make lower cost choices, such as going to an urgent care clinic under the simplified plan, and were much better able to understand the cost ramifications of these decisions under the simplified plan.

The simplified plan also had the effect of provoking more and varied decision-making between options. Without the simplified plan, people expressed fewer clear preferences. With simplified options, they shopped more.

Examining consumer preferences, the researchers found that respondents were initially relatively indifferent between the two plans, but after attempting to compute costs of services under the two plans, their preferences shifted sharply in favor of the simplified plan.

In sum, when the massively complex U.S. health care system is explained clearly to consumers, the odds of them making good choices about their medical care goes up. This would seem obvious—and yet, the existence of a high-level study implies someone needed it proven.