If there’s one thing the recent debate over healthcare has made clear, it’s that Americans are fed up with a system characterized by cost, complexity, and confusion. It’s no secret that the United States spends more on healthcare than any other developed country. In 2016, healthcare spending comprised 17.2% of GDP ($3.2 trillion), compared to 9.2% of GDP in the U.K. Yet cost is not the only thing frustrating Americans. The American health system is incredibly complex. Its basis on a fee-for-service model means less collaboration between doctors, hospitals, and insurance companies, leaving patients stuck in the middle and buried in paperwork. Despite extensive press coverage of the recent congressional attempts at reform, studies show that the majority of Americans have little understanding of even the fundamentals of health insurance. And when it comes to healthcare, what Americans don’t know is hurting them. Most Americans covered by private insurance companies depend on a competitive market to reduce prices and improve quality of service. Yet a functional competitive market is based on consumers to make informed, rational decisions. If Americans don’t understand how to evaluate what they are buying, or even how to calculate how much it will cost them, they will inevitably end up making decisions that inadvertently lead to unnecessarily inflated costs.

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Diagnosis: confusion

Health insurance is a subject that confounds most Americans. A recent study headed by Carnegie Mellon economics and psychology professor George Loewenstein found that only 14% of participants could correctly define the four health insurance terms that would determine the cost of their care. In this same study, only 11% could correctly calculate the cost of a four-day hospital stay when given a standard insurance plan to work from. Another study from the National Bureau of Economic Research showed that the majority of employees at a large firm could not respond to questions about their own health plans or their recent health spending. Consumer frustration is understandable. For most, trying to pick a health insurance plan is like trying to answer a high-stakes multiple-choice question without understanding any of the options.

Consumer psychology and the paradox of choice 

Consumer psychology also plays a significant role in the high cost of healthcare. The consumer choice movement in healthcare has picked up in recent years. Employees receiving insurance as part of their company’s benefits package have more plans to choose from than in the past, and even those on Medicare (the U.S. government’s insurance option for the elderly) can choose from an average of 19 pre-approved insurance plans. Yet more choice doesn’t always lead to better decisions. The paradox of choice is a commonly documented phenomenon in psychology. When presented with too many options, consumers feel overwhelmed and are more likely to either walk away without a purchase, make a purchase that is ultimately unsatisfactory, or resort to a snap judgment to avoid the stress of wrestling with all the options. When it comes to health insurance, any of these reactions can quickly lead to mounting costs and unexpectedly high bills.

There are other psychological factors that lead to consumers making irrational decisions. Professor Loewenstein’s study also showed that consumers are overconfident about their understanding of health insurance. While only 7% of survey participants (all of whom had insurance) admitted to not knowing what an “out-of-pocket maximum” was, 41% could not give the correct definition. Status-quo bias, born partly out of consumers’ confusion and apprehension towards choosing an insurance plan, also means many consumers simply renew their existing plan instead of comparing options, even when their premiums (monthly payments) increase from year to year. The status-quo bias can be exploited by insurers, who slowly increase their prices from year to year on the assumption that patients will stick with their plan.

Finally, the way insurance plans are presented on paper trigger psychological responses that can cause consumers to act against their own best interests. Cost figures play a significant role. Deductibles (the amount the individual pays for a service before insurance kicks in) are particularly deceptive. A 2010 study at a large American company found that employees were willing to pay $500 more in premiums over the course of a year to have a deductible $250 lower. Consumers can also be deceived by common ploys like listing order (more often opting for plans near the top of the list, a phenomenon also documented in ballot voting) and are more likely to select plans labelled “gold” even when these offer less coverage at higher cost.

Simplifying Insurance

While education can certainly help consumers make informed decisions, wider reform is needed. Under the Patient Protection and Affordable Care Act (2010), insurance companies are required to provide consumers with a list of insurance definitions (including terms like “co-payment” and “deductible”) as well as a brief Summary of Benefits and Coverage, which includes examples of medical situations and how much they would cost under the plan. Professor Loewenstein, however, argues the Affordable Care Act’s approach risks leaving consumers unaware of the nuances of their plans, and that it is a better strategy to require insurers to provide more simplified plans in the first place. He proposes eliminating all forms of cost-sharing except co-payments (the fixed amount paid for a particular healthcare service such as a doctor’s appointment) to simplify the system. Loewenstein admits this could produce sticker-shock for consumers, as their co-payments would be significantly higher, but insists ‘…in a traditional plan you’re paying the same prices. You just aren’t as clear about it.’

A single-payer system or one of the Medicare-for-all proposals currently bouncing around some Democratic circles in Congress would make insurance simpler and probably cheaper for many Americans. Yet there are less drastic, more politically realistic steps that can be taken to help restore a truly competitive market while lessening the frustration felt amongst Americans. Regulations requiring insurance companies to provide simplified plans would go a long way towards alleviating consumer frustration (and cost), as would incentivising employers to compile shorter, well-filtered lists of plans for employees to choose from.

Healthcare in America is complicated, confusing, and expensive, and it’s no wonder that Americans are frustrated. But if these three symptoms are interrelated, the treatment can be triply impactful. All that remains to be seen is if lawmakers are up to the challenge.

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