How employees choose their health insurance plans

Investment Analysis Clubs Macro Economic Trends and Risks
1

Two economists got access to a large data set on Fortune 500 Alcoa’s employee health insurance choices from the menu of plans offered by HR. This gives me new insight into how 50% of retirees are now in Medicare Advantage. {LOL}

Note: The “financially dominated plan” mentioned in the abstract below is the one with a low premium and high deductible that allows the employee to save money. All too often, the savings doesn’t materialize and the “suckered” employee ends up paying a lot more for their health care.

Abstract:

The recent expansion of health-plan choice has been touted as increasing competition and enabling people to choose plans that fit their needs. This study provides new evidence challenging these proposed benefits of expanded health-insurance choice. We examine health-insurance decisions of employees at a large U.S. firm where a new plan menu included a large share of financially dominated options. This menu offers a unique litmus test for evaluating choice quality since standard risk preferences and beliefs about one’s health cannot rationalize enrollment into the dominated plans. We find that a majority of employees – and in particular, older workers, women, and low earners – chose dominated
options, resulting in substantial excess spending. Most employees would have fared better had they instead been enrolled in the single actuarially-best plan. In follow-up hypothetical-choice experiments, we observe similar choices despite far simpler menus. We find these choices reflect a severe deficit in health insurance literacy and naïve considerations of health risk and price, rather than a sensible comparison of plan value. Our results challenge the standard practice of inferring risk attitudes and assessing welfare from insurance choices, and raise doubts whether recent health reforms will deliver their promised benefits.

Do Individuals Make Sensible Health Insurance Decisions? Evidence from a Menu with Dominated Options (nber.org)

3 Likes
2

One major problem with making the best choice is that the future is unknown. For example, if you presently healthy and aren’t on any meds, how do you choose the best plan for a future which could involve major medical changes?

DB2

3 Likes
3

Insure for a future that may involve major medical changes?

It’s the whole point of insurance.

Medicare Advantage is cheaper up front, but with restrictions on the back, for the expensive procedures you were hoping to insure against.

Pay a little now, with regular Medicare and Medigap premiums, or risk paying a lot more later with Medicare Advantage, should you need expensive care.

You could be lucky and get out of life unscathed, in which Medicare Advantage might be fine, or even regular Medicare without a gap policy. But as Dirty Harry said it, “Do you feel lucky, punk?”

There is no long term advantage to Advantage.

It’s Orwellian, the way things are named, opposite to how they actually perform.

7 Likes
4

Logic says insurance premiums paid, for the average person, must equal claims paid, plus insurance company overhead and profit, that is, for the average person, they pay more than they get. That has to be the case, for insurance companies to stay in business.

Periodically, I receive a “questionnaire” from the insurance agent I have my condo insurance with. I can guarantee you, no matter what I put on that questionnaire, the insurance agent will be calling me, telling me I need to buy more insurance.

Same thing with this health insurance plan “study”. Is that recommendation that people buy more expensive insurance, a check from an insurance lobbyist talking?

Steve

2 Likes
5

That may be true, however the majority of people are not on Medicare. It seemed to me the main focus was on the working population.

The question remains – how do you choose the best plan for your needs if you don’t know what your needs are going to be?

DB2

6

That is another way of saying “how paranoid are you?” An insurance salesman will be very interested in increasing your level of paranoia. One of my former RS coworkers went on to selling insurance. I ran into him a while later. He said he had never made so much money, nor ever had so much trouble sleeping at night. Sounds about like another former coworker who moved into car sales. He quit the car dealership because, he said, he “got tired of lying for a living”.

Steve

2 Likes
7

In 2011 I had surprise emergency spinal surgery to keep myself from going full paralysis. I’m very glad I had that health insurance, the cost was… $$$. And absolutely necessary.

An ex-boss had an even better story. Heart transplant. $3M. It cost him only a few thousand.

Yes, there is a lot of fear-based selling when it comes to health insurance. But the expenses can be so high, and the outcome literally fatal. Its not in the same camp as house insurance, car insurance, etc.

3 Likes
8

How would you do it, DB2?

I’m in good health?
Don’t drink, don’t smoke.
Diet is no sugar, low carb, focus on complex carbs. Protein n Fats. Intermittent Fasting.
BMI 26.
No diagnosed health issues. No “meds”.
Somewhat educated which has been correlated with “good health”?
A card carrying geezer.
Walk comfortably at 3.2mph for an hour.
Run flat out for 100m. Breathing and heart rate recover within 1.5 minutes.

I chose traditional medicare for:

  • the portability. I’m not locked into a “network”. I like to travel.
  • a friend who works as the interface between her hospital and “insurance”, said from her experience “there is no advantage to Medicare Advantage” to the patient needing care.
  • the “probability” suggests that as age increases, so do chances of a major medical expense.

FWIW, my state retired employee system makes it EASIER to choose the HMO-style MA plan, and not-so-subtly DISCOURAGES choosing traditional medicare.
This “push” to choose MA is in both:

  • the online verbiage with simple forms to choose MA, more complex and confusing to choose Traditional.
  • in in-person telephone conversations. The advisor’s voice dripped with condescension at my insistence on understanding how to apply for Traditional.

I suspect kickbacks influence that system. No, I’ve no proof. Just my innate distrust.

So. How would you, DB2, choose?

:alien:
ralph

5 Likes
9

The problem is not the unknows. The problem is most people do not feel they have the resources for a Medicare supplemental plan. They perceive higher bills using traditional Medicare. They perceive making a wiser decision getting an Advantage plan.

The law is horrible that allows this. It is very foolish on our part to allow this. It drives up the rates for some supplemental plans by reducing pool sizes.

50% of Boomers have next to no savings. This means the “covers everything” lying is forced attraction for them. The individuals in the group may often know better but can not do other wise.

A modern day debtor’s prison

4 Likes
10

I don’t know (which is why the question was asked). The places I worked over the years didn’t have a choice.

DB2

1 Like
11

There really isn’t much choice for health insurance here in the USA. I basically get choices of either a PPO or an HMO, and that’s about it. My employer chooses the provider and often gives us only two choices in plans. Cigna probably gives several levels of PPO plans, for example, but I only get whatever Nvidia chooses to adopt into.

Choices in health care? Who needs choices? < sarcasm off >

1 Like
12

You choose the plan with the lowest actuarial cost. (i.e., if you don’t have any reason to believe that your health is any better or worse than average, you total up the premiums, deductibles and maximum out of pocket cost for each plan offered. Then pick the one with the lowest total.

intercst

2 Likes
13

This report and its very premise are ludicrous. Individuals aren’t making sub-optimal choices amid a plethora of legitimate “choices” in health care coverage, they are blindfolded and throwing a dart at a target that is designed and moved around continuously by monopolistic, anti-competitive, unaccountable corporations.

When working for Corporate America, most employees don’t get a true “choice” of health plans. For a national company operating in forty different metro areas, the employer shops for plans in each metro area which themselves have partnerships with what are likely to be only three or four “networks” of providers who not only own all hospitals and surgery centers in the area but also as of the mid-2010s probably directly employ 90% of all GPs, specialists, surgeons, etc. in the “network.” Sure, you can “choose” to use a doctor that is out of that network but reimbursement rates are often 50% of in-network levels.

An employee’s “choice” for health plans typically doesn’t change which doctors will be available. Most doctors take “the big 3 or 4” in the area. It only alters the monthly premium and the portion of that premium fed to a reimbursement account for spending throughout the year versus directly to premiums.

Most insurance plans also “bundle” prescription drug benefits so the selection of plan not only involves ensuring you are comfortable with the doctors you might be forced to use or give up but understanding the potential impact of any particular deal the insurance company cut with a pharmacy benefit manager company and the deals that PBM cut with actual drug makers. Those deals can suddenly require a change in a long term prescription simply because the PBM negotiated a new deal with Generic B instead of Generic A.

As many patients will attest, particularly those on anti-depressives, drugs are NOT always interchangeable and for more complicated health issues, subtle changes in formulation between intended generics can have major impacts on patients. As many on anti-depressives also know, being forced to arbitrarily switch from one medication to another can completely destabilize a patient who may have taken MONTHS to find a stable dose on medication A amid five other medications they may also take which all interact with each other in completely unpredictable ways.

The key problems in any analysis of the health care “system” are:

  1. Purchasing healthcare INSURANCE is not the same thing as buying health CARE. Insurance companies can alter coverage rules at any time or make decisions in such opaque ways that individuals have no way of assuring at time of enrollment that a given plan will provide expected CARE at the time it becomes needed during that term.

  2. Purchasing health CARE is not the same thing as buying HEALTH. In other words, spending money on care does not guarantee actual health. Ask the tens of millions of Americans with long-haul COVID if their insurance coverage is helping them cure their medical issues resulting from the condition.

  3. Billing of services rendered by “network” monopolies is consistently, intentionally opaque and fraudulent. After having a heart procedure in 2012, I spotted some odd lab charges the hospital had seemingly charged to me as though an outside firm performed the tests at a a premium when ALL of them had been performed in the hospital. After talking to my insurance company, they said “We’re not paying any of these bills for at least three months until the dust settles and the numbers stop changing.” On a $160,000 bill…

Suppose you have a net worth of $2,000,000 and a life expectancy of 20 years. Is purchasing health insurance a smart financial decision? As an individual, decent insurance in a mid-tier city (not NY or LA but not Podunk, AR) will likely cost about $780-850 per month or $9360 to $10,200 per year. Assume it provides Rx coverage for most drugs and a $1000 co-pay for treatments and max copay of $5000 for any hospitalization. Assume a typical BIG MEDICAL problem (heart issue, cancer treatment, unexpected surgery) might cost between $90,000 and $220,000 (just making those up) and assume over your remaining 20 year life expectancy, you might have one or two of those events.

If you already face conditions which require $5000 worth of drugs yearly, insurance is an easy YES decision. The net cost is only about $5200 after factoring in savings on your required drugs. Over 20 years, you would pay about $104,000 in net premiums which would protect you from a big medical bill which we estimated might range from $90,000 to $220,000. Even for someone with $5,000,000, those terms on their own are likely NPV positive. If you get more than one major illness, it’s a no-brainer.

If you have conditions that require a few generics that cost maybe $40/month, now some math is involved. The drugs you know you need at this point are only $40/month or $480/year and if you buy NO insurance, you could keep $10,200, buy the drugs at retail price and save the other $9720 over 20 years to have $194,400 to cover a big bill. AND YOU STILL HAVE $2 million in net worth.

Ah, but how much will that big medical bill cost if you aren’t buying that care at insured rates? You don’t know and have no way to find out – no hospital will publish a la carte uninsured pricing. You’ll find out the cost when they send you the bill. Will “retail” pricing of hospital care be 2X insured rates? 3X? Your willingness to buy insurance to guard against a concentrated sky-high bill over a short period of time depends upon how much of a financial cushion you want to have for food, shelter, taxes, etc.

And if you don’t get insurance and have three big procedures and one final end-of-life downturn that requires a month-long hospital stay, 18 months of nursing home care and 6 months of hospice? A one-month hospitalization might be $500,000. 18 months of nursing home care might be $9000/month or $108,000 per year for a private room. Hospice care is typically around $150/day for in-home care or $500/day for in-patient care so six months of that could be $27,300 to $91,000. There’s no clear picture on how much of that would be covered by private insurance or Medicare / state Medicaid. The amounts add up to $699,000 or 35 percent of the $2 million dollar nest egg. If expenses prior to the time of the illness ate more than $1,300,000 of the nest egg, that will take you to zero. Great if you hit zero exactly. If you come up short or have heirs requiring financial support, not so good for them.

Except for the wealthy with a clear handle on their non-medical expenses and net worth, attempting to make informed FINANCIAL decisions about healthcare is virtually impossible – by design.

WTH

14 Likes
14

Seems that “one size fits all” is only a knock on “big gummit” plans. Zero choice private plans are Shiny.

RS changed their employee health insurance plan, around 90, same time they were cutting pay for store staff. The new plan was not from a company much of anyone ever heard of. Not Aetna, or Cigna, or anyone like that. It was some little jerkwater outfit in Texas. I lived and worked in Kalamazoo at that time. The nearest in-network GP was in Grand Rapids, some 50 miles away. Make the insurance hard to use, and I bet claims expense is low.

Steve

3 Likes
15

I think that’s the problem, that we even have to choose.

Just nationalize it if we want everyone to get care.

Or, leave it like it is, confusing and inefficient by design, like WTH said, and let the insurance companies continue to get exorbitantly rich.

8 Likes
16

As an employee of the federal government, I have over a dozen options.

1 Like
17

However as WTH so eloquently described, it’s still the illusion of choice

3 Likes