Behavioral Economics in Consumer Purchases of Health Insurance – Part 2

Contributor: Roy Goldman, PhD, FSA, MAAA, CERA
To learn more about Roy, click here.

 

Source: Bigstock

In Part 1 of this series, I posited that most individuals do not make rational economic decisions due to cultural, societal, psychological, and emotional reasons. As a result, people tend to choose financially inefficient or suboptimal products when it comes to selecting services and products related to their health and well-being. The examples I provided described scenarios in which some people made decisions that were not in their best interest, while in others the failure of plan administrators (and actuaries) to take human behavior into account resulted in a negative impact on the bottom line.

In Part 2, we’ll explore additional situations, as well as identify actions that can be taken to optimize health and well-being as well as the finances of the patient and the health plan.

Product Selection in Employer Group Plan

In 2008, I was the CFO and chief actuary of the Geisinger Health Plan, which was owned by the Geisinger Health System that includes hospitals, outpatient centers, physicians, and nursing homes. The System hired the Plan to administer its group medical benefits. Historically, employees were offered a choice between a high and low option plan. The benefit differences were substantial, and employees choosing the high option paid more for their benefits, but they paid less than the actuarial difference in costs between the two plans. I didn’t think that was fair. How to fix the problem; that is, how to reduce the subsidy to those choosing the high option? Actually, we proved that you can’t!

My actuarial team built a model to show what is likely to happen as one increases the cost of the high option. We can consider the employees’ health on a scale of 1-10, with 1 being the healthiest, and 10 being the least healthy. Assume the low option plan currently has mostly employees ranked 1-5, and the high option has mostly those ranked 6-10. As the high option premium rises, some 6’s and 7’s decide they don’t need the high option at that price and move to the low option. Now the high option plan is left with 8-10’s, and, as a result the expected costs per insured are much greater, and the premium needs to increase further. Due to the 6’s and 7’s joining the low option plan, its premium needs to rise as well, but not as much as the high option. But now some 8’s decide the premium differential is too great, and elect the low option plan; thus raising the expected costs per person of both plans with the high option plan increasing more than the low option. My human resource friends at the System came to the (correct) conclusion that the fairest actuarial solution is to have one insurance pool with one plan and one employee contribution rate for everyone.

Non-Cost-Related Product Selection 

Can information help consumers make smarter choices? I want to say the answer is “yes,” but that depends on the choices and an understanding of what consumers want. In an article published circa 2007, a large employer reported on its efforts to help employees choose smartly among three different choices: an HMO and two PPO products. Employees were given statistical comparisons among the carriers that reflected what health experts consider important quality measurements; for example:

  • Hospital days per 1000 members per year
  • Average number of specialty referrals per member
  • Average number of radiological procedures per member

After the open enrollment period, the employer was surprised that the majority of the employees did not choose the carrier that clearly had the best quality scores. When surveying the employees they discovered that employees were fearful of choosing the plan with the fewest number of hospital days or fewest specialty referrals, as this implied to them that these carriers might be rationing care, and they may not get the operation or test they might need. The employer also learned that young families made their choice on a different basis: namely, which carrier’s network had hospitals with the nicest maternity wings! Who’s to say that’s not an important criterion? So much for HEDIS.1

Product Selection in Medicare Prescription Drug Plans 

Since Original Medicare does not cover retail prescription drugs, members without coverage through an employer or through a Medicare Advantage plan, can purchase a prescription drug plan [PDP] from a private insurer under Part D of Medicare. This program began in 2006, and from the very beginning, product selection has confounded the experts, so much so that it was a topic of the Medicare Patient Advisory Committee [MedPAC] as recently as April 7, 2022.

The simple truth is that members having the fewest known prescriptions choose the lowest priced plans, while members with many prescriptions choose higher cost plans even though they could receive similar benefits in cheaper plans. Members may change plans annually, and they can go online at Medicare.gov, input their prescriptions, and receive a listing of plans available in their zip code in descending order of total out-of-pocket costs (i.e., premium plus copayments). But, as I discussed in Part 1, insureds are reluctant to switch carriers when they’ve received good claim service from their current carrier. Also, the lowest priced plans have preferred pharmacy networks that may not be convenient to all members. Still, it would make an excellent research paper to learn why so many insureds are not purchasing the most economically prudent plan.

Humana first showed this truth to the market in 2006, the first year of the program. They offered the lowest priced plan, garnered a huge market share, and had a favorable medical loss ratio. When I joined Humana in 2010, they no longer had the lowest priced plan, but one was introduced soon after using Walmart as the preferred network. Humana again experienced a significant growth in market share with favorable claim experience. Indeed, our modeling showed that the lower the price, the more favorable the expected experience,2 although with some sacrifice of market share, as we anticipated that some buyers would be fearful of buying a plan priced so much below the rest of the market. Humana’s experience has been copied by other carriers, so that now every year there is a different carrier with the lowest priced plan (about $8 - 11 a month) in a given market. Healthy, market-wise insureds change plans often. MedPAC is searching for a way to modify Part D so members are not paying $20-$40 a month more than they need to.

Humana doesn’t always get it right. In 2008 Humana suffered a significant earnings miss due to not anticipating that members with a high number of prescriptions would change their behavior and switch to drugs that cost them less. Humana had lowered copayments on tier 1 and tier 2 drugs but priced the plans assuming members would continue with tier 3 drugs. As a result, they overestimated the share of costs that members would pay.3 

Incentives that can change behavior 

Given these examples of economic behavior on the part of insureds, what can health plans do to encourage members to not only choose wisely, but also use the plan’s benefits to remain as healthy as possible given whatever medical conditions they might have? All four health carriers with which I’ve been associated adopted the following point of view:  if we can prevent health conditions from deteriorating, members will be healthier, medical trend will be lower, and future premiums can be more competitive. Other health plans have as well.4 The answer is finding the right nudge. Here are two examples of nudges that worked, and one that doesn’t without some important tweaks. 

  1. Enticing healthy behavior. At Mercy Health Plans, we offered the following plan to select employers. Employees were given one health plan but two choices of employee contributions. To obtain the lower contribution amount and lower copayments, employees had to agree to: complete a health risk assessment; obtain all their age/sex appropriate annual testing; if a smoker, attend a smoking cessation course; if severely overweight, attend a Weight Watchers program; and if diabetic, have eye, feet, and hemoglobin levels checked regularly. To receive lower coinsurance on elective surgery, an employee might be required to view a video describing the procedure and explaining the risks involved along with the typical post-surgery recovery. Employer involvement and support was critical.5 Employees were given time off for these programs and access to a computer at work to record their participation. These plans had lower trend (even negative trend) than the rest of the book of business.

  2. Encouraging Rx use for chronic disease. It is a sad truth that many prescriptions are not filled, or, if filled, are not taken as prescribed. Beginning in 2007, Geisinger Health System implemented two programs for its 16,000 employees. One was a copayment waiver for filling prescriptions for hypertension, high cholesterol, and diabetes. A second program encouraged employees with one of six chronic diseases to participate in an evidence-based disease management program in coordination with nurses employed by the System’s health plan. The carrot was a $200 bonus for enrolling, and two additional $200 bonuses for active participation at six and twelve months. A five-year study confirmed lower incidences of stroke and myocardial infarction as well as lower overall cost of care.6

  3. Encourage smart shopping for services. Circa 2002, Humana was one of the first large employers to provide only a high-deductible plan to its employees on the theory that employees would do comparison shopping for medical services. George W. Bush’s administration pushed this idea. In the ensuing years, almost all large employers include a high-deductible plan as an option for employees with a commensurate reduction in employee contributions.

    From an employee perspective, there are three problems with this approach. First, comparison shopping is extremely difficult. One doesn’t even know all the procedures that might be involved, much less know what one’s insurer will pay, or how much will be left for the insured to pay under one’s plan. Indeed, in 2023 legislation is first being implemented to shed light on what carriers will pay.

    Second, while healthy employees who rarely need medical services can benefit from the lower contributions, employees with chronic conditions are poorly served, as they know they’ll be paying the deductible every year in addition to their contributions. In effect, the costs the employer saves from having a higher deductible is paid by the employees who need the benefits the most.

    Third, historically, there was a disincentive for employees and their family members to seek preventive care, which as pointed out above, is essential for keeping members as healthy as possible.

    A high deductible plan can work if:
    1. The deductible does not apply to annual preventive care or services for specific chronic diseases.7 
    2. There is sufficient and easily accessible information for employees to determine their out-of-pocket responsibility.

I trust that these examples give the reader some insight into consumer behavior that makes the design and pricing of medical and prescription drug products in a competitive environment a dynamic process that involves more than simply projecting medical trend from one year to the next.


Contact Roy at: [email protected]


References:

  1. HEDIS stands for Healthcare Effectiveness Data Information Set (originally Health plan Employer Data Information Set).  It is a standard set of measurements of performance, quality, and member satisfaction first developed by the National Committee for Quality Assurance (NCQA) in the late 1990’s.
  2. Due to the Risk Corridor program, insurers do not retain all the earnings when the medical loss ratio [MLR] is much lower than expected. Nor do they suffer extraordinary losses if the MLR is unfavorable, as the federal government shares in the gains and losses.
  3. Wall Street Journal, p A14, March 13, 2008.
  4. In 2021 the Society of Actuaries published six case histories of health plans’ efforts to reduce medical trend while improving quality. See https://theactuarymagazine.org/managed-care-3-0-case-studies/.
  5. Employers’ concern about their employees’ health and welfare plans has long been a distinguishing feature of those group plans with stable, predictable costs, and those that have frequent carrier changes due to experience being worse than expected. I recall reading a study done at The Prudential on its group clients in the late sixties and early seventies from which the actuaries determined that those employers who provided the most complete set of health and welfare plans, along with generous employer contributions, were the ones who had the most stable costs.
  6. Maeng, Pitcavage, Tomcavage, and Steinhubl, “Can Health Insurance Improve Employee Health Outcomes and Reduce Cost?,” JOEM, Vol. 55, No. 11, Nov. 2013 https://www.jstor.org/stable/48500553
  7. The Affordable Care Act (ACA) substantially increased access to care and coverage of preventive services without cost-sharing for millions of Americans whether or not one has a high-deductible plan. Fewer plans have carve outs/subsidies for those with chronic disease. Some subsidies are now permitted under MA plans. See https://aspe.hhs.gov/sites/default/files/documents/786fa55a84e7e3833961933124d70dd2/preventive-services-ib-2022.pdf