Most Americans pick the wrong health insurance plan. Saurabh Bhargava and his colleagues at CarnegieMellon University conducted a study of almost 24,000 employees at a major Fortune 100company. The study found that 61% of them chose the wrongplan for their needs. The researchers estimated that the average employeecould have saved $372 per year by choosing a different plan. The average cost of these choices was about 2% ofsalary In 2018, over 8% of Americans total householdspending went toward health care costs. This represents about a 37% increase since2004.
It seems like people aren't able to maximize theirwelfare because they're having trouble understanding the decision environment. It's just a complicated product, and people have ahard time figuring it out, which is unfortunate because it's such animportant product. So why do Americans struggle to pick the best planfor them, and how can we fix it? One major issue in choosing a health care plan ispeople don't understand the lingo insurance companies use to discuss each plan. We usually ask every year what is a premium, what isa co-pay? What does the deductible?.
And the results are usually pretty depressing. Only about a third of people usually correctlyidentify all three. These are the most basic terms to understand thisbasic lack of literacy, I think, contributes to a number of problems that people haveexhibited when they do choose from a plan. The way plans are presented to people makes itdifficult to figure out exactly how much each plan costs. People have trouble doing the math from going fromthe features to the consequences. We see things like what's thedeductible of each plan and.
What's the copay of each plan and what's the maximumout of pocket of each plan. The part that's difficult is to actually then say,”OK, so suppose next year I break my leg and I go to the hospital. How much money do I actually spend under each plan?” There are premiums, which is the amount of moneypeople have to pay each month, regardless of whether they go to the doctor. This is the bare minimumsomeone would have to pay for their plan each year if they don't use any health care at all. There are also deductibles, which is a set amount ofmoney a policyholder has to pay out of pocket in the beginning of each year before theinsurance plan will kick in and start sharing.
Costs. It's common for people experiencinginformation overload to hyper focus on one aspect of a plan, such as howmuch the deductible is or how much the premium costs. Rather than looking at the plan as a whole based onhow much health care they'll actually use over the course of the year. When you're in a decision environment that'scomplicated, is to try to simplify it for yourself in some way that you can, and often that's a rule ofthumb or what we call a heuristic. But but in some cases they can go awry. And I think in the case of a lot of health insurancecontexts,.
The heuristics that people use result in themselecting overly expensive plans that that end up costing them quite a bit. A lot of people are basing their decisions on theabsolute numbers they're seeing presented to them, rather than calculating their financial risk witheach plan. One challenge that I think people have is that whileplan choice really should be about your health risk and your willingness to takeon financial risks, I think a lot of people, they look at more expensive plans and theysee more expensive plans as being better, almost like choosing a hotel.
Research has shed light on how to best help peopledetermine the plan that makes the most financial sense for them. Find that showing people the consequences improvesthe choices that they make. The best way is to do the math and figure out howmuch a plan may actually cost over the course of the year based on how much health care the policyholdermight need. One study gave people several health insurance plansto choose from. The researchers also gave the study subjects somehelp choosing their plans by laying out exactly how much each plan may cost based on howmuch health care they use that year. We designed as this tool that allows you to see forevery potential.
Expenditure under each plan, how much money youactually are going to be spending over the course of the year in terms ofboth the premium you're going to be spending and then also how much you're going to be on thehook for relative to how much the plan is going to help you out with. And we could show it in a graph. And you can actually see some plans are above otherplans in this graph in terms of how much money you're spending overall. And the tool helps people to pick a plan that overthe course of the year, they end up on average spending less money. Some employers and state run Obamacare marketplacesare beginning to provide decision aids,.
Such as calculators that help people make the bestdecisions for them. If you are going to do the math yourself, take intoconsideration your own health risks when doing so. That means considering the best case scenariowhere you may not need any care or just preventative care, and the worst case scenario whereyou need a lot of care. You should also be careful to check which doctorsare in-network within specific policies because the doctor you go to can change costs dramatically. If you have expensive health conditions or kind of aserious health history, I'm a cancer survivor, so I have agroup of doctors who I really want to keep seeing because they've savedmy life a couple of.
Times, so. So it matters to me that they're in myplan network. I can't necessarily guarantee that all of yourdoctors or the facilities that you go to, the treatmentfacilities and so forth are going to be covered. So you're really going to have to check. It's not very transparent. So, all the plans have a link to a providerdirectory, but you know you're going to have to kind of clickinto all of them. It's also important to revisit a policy every year tosee if it's still the best option that fits your needs, even if your employer hasn't made any changesto the plan.
So only 20-25% of employees and employer-sponsoredcontexts will actually change their plan from year to year. So, if you choose a poor plan from a financialbasis, then normally you stick with that plan for potentially multiple years, so itcan become quite a costly choice. There are places for people to turn to get assistance If you are looking at marketplace coverage anywhere. There are navigators. These are trained experts who can help you walkthrough.
The application, answer any questions. What am I supposed to fill in here and help you kindof sift through the plan choices and try to figure out how they're howthey're different and which one works best for you? Picking the wrong plan means people are spending moremoney on health care than they have to, and the numbers show it. Health care costs in the U.S. have been rising overall due to a variety offactors, including out-of-pocket expenses for Americans. Health care spending in the United Stateshas gone from 6.9% of total GDP in 1970 to more than 17.5% percent as of2019.
When we are spending that amount of money on healthcare. That money is not available for other sectors of theeconomy. The average American household is also spending moreon health care. According to federal data, average deductibles inemployer plans more than doubled between 2008 and 2017, from $869 to $1,808 . Cost of living as a whole is also getting moreexpensive, which puts more pressure on Americans because wages have not been keeping upwith this increase in prices. The average household income in the U.S. increased by 27% between 1984 and 2020.
In that same time period. The average American household spending on food rose155%. Spending on housing rose more than 160%, andout-of-pocket spending on medical care rose more than 390%. This burden of income is not keeping up with costshas implications for what kind of plans Americans are drawn to. High deductible plans can be a big problem for a lotof people because they may not have the cash for it. The recent proliferation of high deductible plansacross.
The employer sponsored landscape is that there's areal worry about liquidity and being able to pay for out-of-pocket costs. These liquidity concerns are also driving, drivingpeople to select what end up being fairly expensive plans. Bhargava's study found that employees earning lessthan $40,000 per year were much more likely to select a plan that would end upcosting them more money. Lower income employees were also less likely toswitch their plan each year, and even when they did switch, they were less likely than higher incomeemployees to switch into the highest deductible plan. The high deductible plan tends to be the better valueover the long term.
Because that plan you're paying a lower premium, andthen under many states of the world, especially the ones whereyou're relatively healthy, you end up paying less over time. Ultimately, economists say that the whole systemneeds to be simplified in order to provide plans that are higher quality while also being more affordable, Whereby we we get rid of a lot of the complexity ofcost sharing and replace it with just a much more simple, much moretransparent menu of options. But attempts to make the actual costs of plans clearcan backfire.
For example, on the Affordable Care Act marketplace,which is frequently called Obamacare, people are presented plans using a metal tier system. A plan could be labeled as platinum, gold, silver orbronze. These are meant to help people understand the costsharing features of each plan, so the platinum plans have the most financial coverage. The insurance company would pay 90 percent of costsat the time of service, and the policyholder would pay the remaining 10 percent. The trade off is that those plans have a highermonthly premium. At the other end of the spectrum, a bronze plan hasthe least amount of cost sharing.
Support. The insurance company pays 60 percent ofthe cost of service and the policyholder pays 40 percent. Research shows that people are misunderstanding themetals, thinking there are actually a reflection of the quality of the plan, rather than the amount ofmoney they'll end up paying in monthly premiums or out-of-pocket costs at time of service. President Biden signed an executive order in July2021 that aims to improve cost transparency and standardize plans on healthcare.govstarting in 2023. The goal of the order is to make it easier forpeople to compare across plans. Several states, such as Maine, Massachusetts,Oregon, Rhode Island and.
Vermont have rolled out budget comparison tools tohelp people navigate the state's local health insurance exchanges. Well, I think giving people access to this type ofdata in a in a way that is simple to understand would definitely be helpful. Having more information that is easy to understandis very important.