A Little Knowledge Is a Risky Thing: Wide Gap in What People Think They Know About Health Insurance and What They Actually Know

By Kathryn A. Paez and Coretta J. Mallery
American Institutes for Research, October 2014

Health insurance is among the most complicated and costly products that consumers buy. Lacking health insurance-related knowledge and skills — or health insurance literacy — puts people at risk of choosing an insurance product that could fail to provide needed benefits or protect them financially.

More than half of all people surveyed were moderately or very confident in their ability to choose and use a health plan that is best for their family, but their actual knowledge was less.

Because many people believe they know more than they do about health insurance, they may not fully understand their options before committing to a particular health plan for an entire year, or they may have an unpleasant surprise when they use health care services and end up owing a larger amount out of pocket than expected.

Understanding Plan Type and Calculating Cost Sharing

When comparing and selecting health plans, 61 percent of people said they were moderately or very confident that they could choose the best health plan for themselves. Only 23 percent could identify characteristics of a preferred provider organization (PPO) — for example, “you may have to pay a percentage of the bill.”

Three out of four people said they were moderately or very confident that they have the knowledge to use health insurance. However, only 20 percent could accurately calculate how much they would pay for a visit to an in-network doctor when presented with a cost-sharing scenario that included a copayment, deductible and coinsurance.

Skills Differ by Age, Care Use, Race, Income, Education

Generally younger people were less health-insurance literate — for example, people aged 22 to 34 got an average of 55 percent of knowledge and skills items correct.

Likewise, people who use health care less frequently had more difficulties.

Health insurance knowledge and skills also varied greatly by race, with blacks and Hispanics on average having less knowledge about health insurance.

Knowledge and skills also decreased with income and education.

Implications

Choosing and using a health insurance plan can be daunting, especially for people with little experience with the health care system and health insurance. According to the 2013 AIR Health Insurance Literacy Survey, many Americans are unprepared to make informed choices when selecting and using health plans — especially younger people, minorities, people with lower incomes and those with less education.

At the same time, health insurance and benefit structures are becoming even more complex. As mentioned previously, consumers likely don’t need to know the exact differences between an HMO and PPO, but they do need to consider important health plan characteristics — such as patient cost sharing, which hospitals and doctors are in network, and the rules for out-of-network coverage — when choosing a plan.

Without efforts to increase health insurance knowledge and skills, many insured people will remain at risk of forgoing needed care if they don’t understand how their health insurance works or how to estimate out-of-pocket costs.

At a minimum, counseling efforts could stress that once people are enrolled, they should contact their health plan member services department to get questions answered.

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Great. The insurance exchanges established by the Affordable Care Act have created a shoppers paradise for health insurance. People can choose from different premiums, different plans, at different levels of coverage, with different benefits, and different cost-sharing deductibles, co-payments and coinsurance, with different networks of physicians and hospitals, and different rules on out-of-network coverage, not to mention different insurance structures such as PPOs, HMOs, EPOs, and ACOs, whatever they are.

How many times have you heard physicians, nurses, health policy wonks, and knowledgeable others say that they have trouble figuring out their own insurance plans. Most end up waiting until they receive their Explanation of Benefits to find out just what was covered. How on earth can we ever expect people with little prior exposure to the intricacies of health insurance to be able to shop intelligently for plans offered in the exchanges? We can’t.

The tragedy is that poor choices in plan selection can have major impacts on both the physical and financial well being of the health plan purchasers. But when you think about it, virtually every plan offered has significant deficiencies, especially in limiting access through narrow networks and in increasing risk of financial hardship through excessive cost sharing. The subsidies may help some, but they are inadequate for most. Not only are the choices difficult to make, they are mostly all bad choices.

Those concerned about lack of “health insurance literacy” – an almost universal phenomenon – suggest that the solution is to increase transparency in the exchanges. But the authors of this report suggest that we need much more. Health insurance shoppers need additional training to “increase health insurance knowledge and skills.” Is that the answer?

What we want is a system wherein whenever we need health care, we go get it. Period. What we have is a conglomeration created by private and public intermediaries that make it difficult to decide where you can go when you need health care and how to pay for it ex-ante (premiums) and ex-post (cost sharing). And we end up paying much more for all of the administrative excesses that these intermediaries have created.

Do we want to make it all go away so that each of us can simply get the health care that we need? Easy – single payer.