With the major technical hurdles overcome, Healthcare.gov must turn to helping consumers make better choices

The creation of state and federal healthcare exchanges represents a significant first step towards bringing greater rationality to health insurance markets, but the design of the exchanges may still lead consumers astray.

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Based on research by Peter Ubel, David Comerford, Eric Johnson, Ran Hassin, Tom Baker, Allison Bajger, and Galen Treuer

As many as 14 million Americans are expected to sign up for health insurance through state and federal exchanges during the open enrollment period that began last this month, according to the Department of Health and Human Services. Already, the Affordable Care Act has succeeded in bringing the total number of uninsured Americans below 10 percent for the first time in more than 40 years. While the exchanges still face regular political challenges — including last week’s Senate vote to repeal most of the Affordable Care Act — according to Eric Johnson, the larger challenge remains to design the exchanges in a way that maximizes the chances consumers will choose the best plans for themselves.

In 2013, Johnson, the Norman Eig Professor of Business and co-director of the Center for Decision Sciences at Columbia Business School, and his fellow researchers found that buyers performed at “near-chance levels” when selecting plans for themselves. In one study, consumers overpaid by $456 per person, per year, on average. In aggregate, consumers may overspend by as much as $5 billion next year, and with as many as eight in ten users of the exchanges qualifying for federal subsidies, taxpayers and the federal government may face a needlessly high bill.

­­While many of these challenges derive from a poor understanding of health insurance policies generally, simple tweaks to the design of online exchanges like Healthcare.gov could help healthcare consumers make better choices, Johnson says.

One common problem in the first two years of the exchanges, identified in a recent paper co-authored by Johnson in the New England Journal of Medicine, is that many exchanges sorted plans by premium — the monthly cost to maintain coverage — instead of total out-of-pocket cost. “The problem is low-premium plans have high deductibles, so people were in for a shock when they received high medical bills, while thinking they had purchased plans that would cost them less,” Johnson explains.

The problem is exacerbated by the tendency of individuals to choose items that appear higher on lists, likely prompting many consumers to select high-premium plans, regardless of whether they met the individual’s needs. This isn’t a new concept, as Johnson explains, “we know that in stores, shelf position matters. It’s also important on the web in terms of how people make decisions.”

This year, for the first time, the federal exchange will not provide users the option to sort plans by premium during open enrollment. Instead, plans will be ordered by estimated overall cost, a significant first step towards helping shoppers find the best plans for themselves, according to Johnson. Healthcare.gov has also rolled out its first calculator to assist users in estimating total costs for different health plans. While Johnson has found that calculators can significantly reduce overspending by consumers, under experimental conditions even with calculators consumers chose the best plans only 47 percent of the time and overpaid by $364 a year on average.

To fully address overspending, Johnson suggests, consumers need both the aid of a calculator and the appropriate mental models to understand the design of plans. And that’s where the exchanges may lead consumers furthest astray. Plans designed for young, healthy buyers, which typically have low premiums and high out-of-pocket costs, are often labeled “catastrophic” policies. The moniker was meant to indicate that the policies had been designed for individuals who only needed coverage for unanticipated catastrophes, but, as Johnson points out, few people want to buy something labeled “catastrophic.” The plans accounted for less than 0.7 percent of all purchases on state and federal exchanges in 2015.

In addition to the catastrophic plans introduced by the ACA, options are often further categorized as “bronze,” “silver,” and “gold,” depending on the price of their premiums, with “bronze” plans having the lowest premiums and highest deductibles and “gold” the opposite. Yet, due to the common association of these labels with first, second, and third place, people often interpret them as indicating the quality of the care provided, leading to a strong bias toward “gold” plans. The effect is particularly pronounced among consumers with below-median mathematical skills, who, in an informal survey, predominantly chose the plan labeled “gold,” even when the actual details of the plan were switched with the “bronze” plan.

Further, Johnson suggests, smart defaults based on health and demographic factors could nudge consumers towards plans that are better fits for them. “If you think about a site like Netflix or Amazon,” Johnson explains, “they’re able to recommend products to individual users based on their profiles. Exchanges could use the information provided by consumers the same way, to steer them towards the products they’re looking for.” Similarly, exchanges could use information like a consumer’s age, prior healthcare spending, and number of dependents to provide “smart defaults,” automatically suggesting plans that best meet consumer needs.

By presenting plans in a more nuanced and adaptive way and by providing consumers with tools — from calculators to simple explanations of terms to smart defaults — online exchanges could help rein in excessive healthcare spending while bringing care to a larger swathe of the population. “Health insurance exchanges have the potential to revolutionize US healthcare markets,” Johnson and his colleagues wrote in the New England Journal of Medicine. “The current healthcare exchanges represent one very complicated experiment; we hope that state and federal decision makers are observing the outcomes.”

About the researcher

Eric Johnson

Eric Johnson is a faculty member at the Columbia Business School at Columbia University where he is the inaugural holder of the Norman Eig...

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