How should you choose your health plan? Professor Ben Handel shares some research wisdom

"Don’t assume that because a plan is the most expensive, it will provide you with the best value," cautions Professor Ben Handel.

Ben Handel

“Choosing health plans is complex,” says Berkeley Economics Professor Ben Handel, who was recently honored with the ASHEcon Medal, awarded to the top healthcare economist under 40. “Consumers need to assess their own health risk, the overall cost for each plan, and what medical providers they can access via each plan.”

On April 1, Berkeley Economics Professor Ben Handel gave a talk hosted by the law firm Downey Brand that explored the dilemma consumers face in making health insurance choices and in utilizing the insurance they choose. In the Q&A below, Professor Handel shares a few key takeaway points from his presentation.

Q: Your research looks at how we choose our health care. Tell me how you got interested in this topic.

Choosing health care is a complicated topic. It can be difficult to get clear information on all of the various factors that go into the decision making, and even when one has clear information on these factors it can be difficult to integrate them effectively. I got interested in this topic because economists have generally assumed that consumers are quite sophisticated in their models, which motivate many key policies, yet it seems quite clear in practice that consumers have meaningful difficulties in evaluating and choosing coverage.

Q: You discussed in your presentation that privatized Medicare, ACA, and other insurance systems are built on the assumption that consumers make good choices. Why is that a problematic assumption? Why is it so hard to choose the right plan and what are some possible pitfalls?

Evidence points to consumers having difficulties choosing between health plan options. Since they have a hard time selecting the best option for themselves, this dulls the incentive for insurers to offer the best products, both in terms of lower premiums, more efficient providers, and better cost-sharing features. 

There is a range of mistakes consumers make. Substantial evidence shows that consumers leave hundreds, and sometimes thousands, of dollars on the table due to inertia. This means that a consumer will not change their default, previously chosen plan, even as premiums or their own health change.

Even when actively making a choice, consumers often struggle with insurance literacy (i.e. understanding what all the terminology means and how to integrate plan characteristics into decision making). For example, consumers often don’t understand which doctors are in or out-of-network, what a deductible means, what coinsurance means, and how they will be charged for out-of-network services.  

Q: There seems to be some connection between consumers having more agency over their choice and making optimal choices. Tell me how that connection works. 

If a regulator or employer wants to steer consumers towards better options, they can use softer nudges or more aggressive nudges. A softer nudge might be something like information provision via a salient mechanism, such as sending a consumer an email with clear targeted information about their plan choices. A more aggressive nudge can come in the form of a regulator/employer opting consumers into default plans year on year based on their health needs. Defaults have been shown to be quite effective in steering consumers in health plan choice as well as in other areas like 401(k) choices. 

The key question is whether strong defaults over-steer consumers, and, in doing so, hand over the market to the algorithm. This, in turn, could lead to a range of downstream issues, like capture of the algorithm by insurers lobbying a regulator or by errors made in constructing the algorithm. Thus, even though softer nudges may be less effective in steering patients, they also may stick closer to the foundations of the market-based motivations for setting up the ACA and Medicare Part D health plan exchanges.  

Q: In your presentation, you mentioned that often regulators or other “middlemen” help curate, or ration, the consumers’ pool of choices. How do they go about doing that? Is that always to the advantage of the consumer?

Typically a regulator or employer will curate choices by setting some specific goals, such as low premiums or broad networks, and then work with insurers to make sure they achieve those objectives. 

The regulator/employer will bargain with insurers and use the threat of exclusion (i.e. not including the insurer in the set of offered products) to secure lower premiums or better plan characteristics for consumers on other dimensions. If the regulator or employer has consumers’ best interests in mind, this can be an effective way to provide strong options to consumers without allowing for them to choose some of the worse options that would have otherwise been in the market. This type of policy might not be in the best interest of consumers if, e.g., some consumers would be best off in some of the plans that are removed from the market as a result of regulatory actions. 

Q: Finally, what is the best advice you’ve heard for making good health care decisions?

Don’t assume that because a plan is the most expensive, it will provide you with the best value if you want access to comprehensive health care. In many cases, if you don’t expect to spend a lot on health care, but want good access to the best doctors if you do need health care, it makes financial sense to buy a cheaper plan, with more cost-sharing, as long as you verify it has a broad range of providers in-network. Often, by choosing the most expensive plan, you’re joining a pool with people who are less healthy on average and, thus, paying a high premium to cross-subsidize their expenses if you are healthy. 

The Berkeley Economics staff and faculty would like to thank our alumni and friends for their support which fuels the important work of our colleague Ben Handel and many others in the department. To learn more about how to support Berkeley Economics and receive special invitations to events like these, please contact Christian Gordon or Anya Essiounina. Thank you.