Study Finds We Might Not Select the Best Bundled Insurance Plans for Our Needs

Choosing the right health insurance plan is difficult. People typically face large menus of plans that differ on various dimensions, like what health services are covered and how insurer co-pays are structured. A further layer of complexity is that plans for one set of services (e.g., drugs) are often bundled with plans for a different set of services (e.g., hospital). This “product bundling” affects the choice environment and may in turn affect the choice strategy a person uses. A recent study published in the Journal of Human Resources asks, “Do we get it right?”

Nathan Kettlewell (University of Sydney) conducted an experiment involving hypothetical health insurance plans to analyze the quality of peoples’ health insurance choices, what choice strategies they use, and how product bundling affects choices. By analyzing repeated choices, he was able to estimate peoples’ willingness to trade off price against coverage. He considered the bundling of hospital coverage with coverage for out-of-hospital ancillary services (e.g., dental, optometry).

So are we smart buyers of insurance? Kettlewell: “My main findings are that people often make choices that imply irrationally high willingness to pay for extra coverage and fail to minimize out-of-pocket costs. They often focus narrowly on coverage for a single health service. Product bundling reduces choice quality, and choice quality is not much better for highly educated and experienced consumers.”

These findings imply that standard models of insurance demand, which assume people make rational, informed decisions, are likely to get wrong the insurance preferences of many consumers. They also have implications for regulating the choice environment. For example, decision tools that increase the salience of price relative to coverage, such as through expected-value calculators, are more likely to help people make better decisions than education interventions.

Read the full study in The Journal of Human Resources: “Policy Choice and Product Bundling in a Complicated Health Insurance Market: Do People Get it Right?” by Nathan Kettlewell.

Nathan Kettlewell is a research fellow in economics at University of Sydney (@USydneyEcon). He acknowledges funding by the ARC Centre of Excellence for Children and Families over the Life Course.