A new paper just was released in the Journal of Economic Perspectives that looks at the value of too much choice in health insurance (Erickson, Sydnor).** There are real costs to too much confusion as people will often make choices that are inefficient.
Insurers like inefficient choices. They want people who are likely to be very healthy and very low utilizers to buy low deductible, high premium insurance. If a highly probably low utilizer chooses a more expensive plan, that is more money that they are paying in premiums that is available to either cross subsidize high utilizers or hookers and blow.
On Healthcare.gov in 2018, the range of offered plans in each county goes from 2 plans in 6 counties to 119 plans in Seminole County Florida. Two plans are too few. 119 plans are too many. In 2017, the range was similar. Some of the variation is due to the number of insurers in a county. The more carriers in the county, the more plans we should expect. Even in single insurers counties, the number of unique plans ranges from 2 plans to 49 plans.
Some people have an easy choice. If they know that no matter what that they will have very high medical costs, their search criteria is first a function of network and then hassle factor before coming down to total costs. If the network is sufficient and hassle is similar people with high medical costs decide on the sum of net premiums and maximum out of pocket expenses. However most people don’t have those types of high cost conditions. They might have a blood pressure medication and see their cardiologist once a quarter as baseline costs but the major decisions are based on probabilistic thinking and how they interact with the varied cost sharing.
Most insurers are not stupid. The cost of designing plans once a baseline network is built and plan type established is fairly low. Creating twenty or thirty or forty different choices where the pragmatic meaningful difference is minimal means people will get confused. Confused people will either not buy or they will not buy optimal plans. And if they are not buying optimal plans that either means they are paying more in premiums than they should or they are paying more in out of pocket expenses than they should. Confused reasonably healthy buyers means the table is tilted towards the insurers. They are the experts who have people thinking about choice architecture and cognitive biases every day of the year.
** Ericson, K. M., & Sydnor, J. (2017). The Questionable Value of Having a Choice of Levels of Health Insurance Coverage. Journal of Economic Perspectives, 31(4), 51-72. doi:10.1257/jep.31.4.51