If you get health insurance from your employer or from the market place, you have to make decision every year about which coverage to choose.
So here is a warning: If you are simply sticking with an old plan with a low deductible, that may well be a wrong and costly choice.
You might wonder how anyone could say that choosing one plan over another is “wrong.” Surely such a choice depends on personal preferences about doctors, premiums, deductibles and other factors. And that’s all true. But the mistake I am referring to is different. Lack of understanding and with the overly complicated plans to choose from, many people are paying more without getting anything extra in return.
Economists have a term for a situation like this, where one option is better than another under any circumstances, dominance. This is what we see in many workplaces: The cheaper health care plan, at every level of medical spending, often has a higher deductible — a higher spending hurdle that must be reached before reimbursements begin.
Because people tend to keep the older, low-deductible plans they already have — and because they are often frightened by high deductibles — large numbers of workers and their families are spending more than they need to on health care.
In most cases, if employees do not take direct action during the annual open enrollment period, they automatically continue with the previous year’s choice. But even if that was the right choice yesterday, it might not be today. According to the Kaiser Family Foundation, 49 percent of the United States population receives health insurance through an employer-supplied plan. Several studies indicate that a sizable fraction of employees choose more expensive plans with low deductibles when high-deductible versions are available. (High deductibles are still unusual for health maintenance organizations, which limit consumers to a single provider.)
The most-popular option is a health plan with a low, $250 deductible. Employees would have saved money and received the same services, whatever their spending on medical expenses, if they had shifted to a plan with a $500 deductible. But only 11 percent of people in the dominated plan (the plan that is more expensive at every spending level) switched to the less expensive one. The cost of this inaction was enormous: Employees spent $4,500 per year on health care annually, on average, and could have saved $2,032 with the cheaper higher deductible plan.
Simply providing consumers with good options doesn’t ensure that they will choose wisely. There was an anonymous study done on a large company that gave employees many choices. The company’s workers could choose from among 48 different combinations of deductibles, prescription-drug co-payments, co-insurance rates and maximum out-of-pocket costs. (Each version offered the same network of doctors and hospitals.) The results were troubling: A majority of employees selected financially dominated plans — generally, those with low deductibles, which were worse in every spending scenario. These employees who picked plans with a deductible of $750 rather than $1,000, for example, were essentially paying $528 to reduce their deductible by $250. That is not smart. This shows that people often do not understand the choices they are making when it comes to health insurance.
Counterintuitively, the “no-brainer” high-deductible plans were not only cheaper. They were less risky for consumers because they capped out-of-pocket costs at a lower level.
People make exorbitant health care choices for reasons that include:
■ Inertia. It is easier to stay with a plan picked a long time ago. ■ Math. It is time-consuming and, in some cases, challenging to do the calculations required to assess these plans. ■ Deductible aversion: Many people seem to hate deductibles, whether for home, car or health insurance. They may not be comfortable with the burden of deciding whether a particular expense is worth it.
It is better to look at all of your options and compare. My main message right now is this: If you are offered a high-deductible plan, do disregard it. Compare the whole policy and out of pocket expenses, you may be overpaying for what you are getting in return.
Whatever you do, investigate your options. You may be surprised by what you find.