The ACA health insurance markets rely on individuals to choose a single plan from a menu of plans of varying lengths. At some points, in some counties, there was a single plan to choose from. Other counties in other years have had over 150 plans to choose from. There are some notable divisions of relevant plan characteristics. Different insurers have different reputations and different product profiles to offer. The metal bands function as a signal of one interpretation of value. But it can still be a complex choice environment with 45% of Healthcare.gov enrollees seeing 50 or more choices in 2021, and likely to see even more choices in 2022.
There can be meaningful difference between all fifty or more plans. There can also be plans that are barely differentiable besides a few benefits that no one is likely to use. The Obama Administration had very weak meaningful difference rules where plans had to be distinct from other plans on one of seven criteria. The Trump Administration got rid of those rules. I don’t think there was much of an impact either way.
I think that the choice space is challenging and that more distinctive choices would be beneficial which means more aggressive choice curation would improve consumer and social welfare. I am coming at this from a perspective advanced by Herb Simon which says that we’re messy barely evolved East African Plains Apes that get easily confused and have limited cognitive resources to figure things out. Information and search costs can be expensive. We have bounded rationality. Therefore we adopt heuristics, and schemas. We see a good enough solution but likely suboptimal solution. We satisfice.
We also have predictable and consistent known failure modes. We hyperbolically discount. We anchor on primacy and recency. We anchor on attention. We are a priori rational when we devote a whole lot of energy and effort to that, and retrospectively rational once we invent a good story to tell ourselves.
This is how I approach the world. I think that at least in the health insurance choice space, we have pretty good evidence that inertia is important and plenty of people make dominated choices which are fundamentally irrational. From here, changing the size, scope and complexity of the choice space is an empirical question as to what direction social welfare moves.
The other way to think about decision choice is a Milton Friedmanesque set of assumptions where people are either rational or act as if they are rationally utility maximizing based on currently available information. From this set of assumptions, increasing the choice space either reduces the variance between an individual’s ideal point and the closest available option or does nothing at all. In either case, increasing the choice space does not decrease welfare while it can increase social welfare.
In either set of assumptions, a proliferation of expert tools and decision supports to help people act as if they are rational at low cost to themselves are a good thing. If there are five hundred hidden possibilities and only half a dozen presented options that match to revealed preferences, then the quality of choice improves and social welfare is likely better off. But there is a big difference in analytical outcomes if there are over a hundred and fifty visible choices and we apply either a bounded rationality perspective or an as-if rational maximization perspective.