By Benjamin R. Handel, Jonathan T. Kolstad, Thomas Minten, and Johannes Spinnewijn
National Bureau of Economic Research, September 2020
Market provision of impure public goods such as insurance retirement savings and education is common and growing as policy makers seek to offer more choice and gain efficiencies. This approach induces an important trade-off between improved surplus from matching individuals to products and misallocation due to well documented choice errors in these markets. We study this trade-off in the health insurance market in the Netherlands, with a specific focus on misallocation and inequality. We characterize choice quality as a function of predicted health risk and leverage rich administrative data to study how it depends on individual human capital, socioeconomic status and social and information networks. We find that choice quality is low on average, with many people foregoing options that deliver substantive value. We also find a strong choice quality gradient with respect to key socioeconomic variables. Individuals with higher education levels and more analytic degrees or professions make markedly better decisions. Social influence on choices further increases inequality in decision making. Using panel variation in exposure to peers we find strong within firm, location and family impacts on choice quality. Finally, we use our estimates to model the consumer surplus effects of different counterfactual scenarios. While smart default policies could improve welfare substantially, including the choice of a high-deductible option delivers little welfare gain, especially for low-income individuals who make lower quality choices and are in worse health.
By Don McCanne, M.D.
Advocates of consumer-directed health care often cite the Netherlands as having a model that we should consider for the United States. They have a regulated private insurance managed competition model with a mandate for all individuals to purchase coverage. Insurers compete in the marketplace for consumers on premiums, provider choice, and supplementary insurance. A minimum compulsory deductible is required with an option of varying higher levels of voluntary deductibles.
Although this study is quite complex, important conclusions are: 1) low-income individuals are in poorer health and make lower quality choices in their insurance products, 2) individuals with higher education and socioeconomic status make better choices, and 3) offering a high-deductible option provides little welfare gain, especially for low-income individuals.
Regarding deductibles, many studies have shown that, for lower-income individuals, they create financial barriers to beneficial health care services and they often cause financial hardship for those who must access health care. Higher income individuals who are in good health and can reasonably be expected to remain so, can benefit financially by selecting higher-deductible plans, but that does not benefit society since their premium contributions to the collective insurance risk pools is regressive – the wealthy pay lower premiums than the poor (though if funded through the tax system instead of individual premiums payments can be made progressive by design).
Although market enthusiasts may contend that the welfare benefit of choosing plans from the private marketplace benefits the purchaser, this study shows that only those of higher socioeconomic status are benefited whereas it is detrimental for both the finances and the health of those with a lower socioeconomic status. Enthoven’s managed competition, as they have in the Netherlands, is a terrible model for a universal health care financing system.
Besides, what is this American obsession with marketing different plan designs? What we need is one plan design that offers all essential services to everyone. We can fund that equitably through progressive taxes that would be affordable for each individual. We can and should eliminate insurance gimmicks that define different plans in the marketplace – gimmicks such as taking away choices of physicians and hospitals by limiting coverage to networks, impairing access by financial barriers including deductibles, copays, and coinsurance, or by stripping coverage of beneficial services thus creating bare bones plans. None of those benefit the patient, only the insurer.
The bottom line? As always, we need to enact and implement a well designed, single payer improved Medicare for All – quality, comprehensive, affordable care for everyone.
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