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In the wake of Donald Trump’s upset victory, Obamacare is a hot commodity. The day after the election, a record 100,000-plus signed up for heath care on the exchanges, some figuring it might be their last chance. President-Elect Trump has said he’d be willing to sign an Obamacare repeal bill on his first day of office.
Whatever happens, health insurance is sure to be high on the national agenda for 2018. One of the few points of bipartisan consensus is consumer choice. What’s not always appreciated is that the public is clueless about many basic health insurance terms.
A study in the Journal of Health Economics surveyed knowledge of four key terms: deductible, copayment, coinsurance, and maximum out-of-pocket limit. Comprehension rates ranged from 78 percent for “deductible” to 34 for “co-insurance.”
Those four terms fit together like a well-oiled Rube Goldberg machine. Unless you understand all four, you won’t have any idea how much you’ll have to pay for a doctor’s visit or procedure. Another set of survey questions underscored that, asking participants to calculate out-of-pocket expenses for some common procedures, using the terms of a simplified insurance policy. Only 40 percent could correctly determine the cost of an emergency room visit, even with the hospital charges and policy terms right in front of them.
At best consumers understand the jargon to be weasel-words that insurers use to get out of paying. But vague cynicism is no help in making decisions about one’s health. The cost bears on how important it is to use an urgent care center rather than an ER; to use an in-network doctor rather than an out-of-network one who comes highly recommended.
In 2008, an online insurance company, eHealth, reported that only half the public knew their monthly premium. Nor were people good at identifying health-care acronyms. Just 36 percent could tell what an HMO was, and comprehension rates were worse for PPO (20 percent) and HSA (11 percent). (Not tested was this year’s brand of alphabet soup, EPO.)
Behavioral economists say the most common mistake of insurance buyers is picking a too-low deductible. Customers don’t like deductibles, as it’s an amount they must pay out of their pockets before the insurance company pays anything. But they take this dislike to irrational extremes. Studies have shown that some are willing to pay more than $250 in extra premiums to reduce a policy’s deductible by $250. This is like buying like an extended warranty that costs more than a brand-new appliance.
It doesn’t have to be this way. An insurer could dispense with the weasel words and—for a suitably higher premium—agree to cover 100 percent of every medical expense beyond Band-Aids and aspirin. This isn’t necessarily unworkable. There are gold-plated private plans that do that.
George Loewenstein, the lead researcher in the Journal of Health Economics study, proposes an ingeniously simple alternative. Design a policy around copayments. A copayment (or “copay”) is a fixed fee the consumer pays for each specific type of doctor visit or procedure or prescription, regardless of deductibles. In the survey, 100 percent said they understood what a copay is and—glory of glories—a respectable 72 percent actually did.
Under the present system, copays are usually modest because the consumer is also paying coinsurance (a percentage of a billed item’s cost) and may indeed be footing the entire cost, if the deductible has not been met. Under a copay-only system, the copays would have to be higher.
Fair enough. The difference is that the consumer would know exactly what everything would cost. It might be, for instance, that an emergency room visit would have a copay of $300, while a regular doctor’s visit would be $50. That would allow more intelligent decisions about whether to go to the emergency room.
As Congress considers the future of American health care, it’s important to remember that a free choice must be an informed choice. Few Americans have the time or patience to educate themselves on insurance jargon. It’s better to create easier-to-understand policies than to conduct massive education campaigns (that are unlikely to move the needle on the ignorance dial much anyway).
