Do you understand health insurance? Most people don’t.

August 8, 2013

Clear your desk of your favorite health policy reads: This is a Wonkblog Pop Quiz. You didn't know those happened? Well, that's pretty much the point.

A little while back, a health-care economist at Carnegie Mellon University rounded up 202 people who had employer-sponsored health insurance. And, he gave them this quiz: Define four basic health insurance terms. It's right here, for you, dear reader, to take.

Most people who George Loewenstein, the health-care economist, studied could get one or so questions right – and thought they had pretty decent comprehension of how health coverage works. But only 14 percent could identify what each of the four terms mean (answers, if you're curious, are at the very bottom).

And when Loewenstein gave his study participants a hypothetical insurance plan, and asked them to figure out what a four-day hospital visit would cost, 11 percent were able to figure out the price. Just 14 percent were within $1,000 of the right answer.

Only 14 percent answered four multiple choice question about the four most basic insurance features. The respondents to the survey were a representative sample of people who had an insurance policy and were the primary or secondary stakeholders. Involved in making decisions about the insurance plan.

"I have a PhD in economics and I've spent a bunch of time giving insurance companies feedback about policies, and I still find them difficult to understand," Loewenstein said. "I assumed that extrapolating from myself that the average American individual would have an even lower understanding."

This study, published recently in the Journal of Health Economics, seems to prove Loewenstein's hunch right. Most Americans don't have a comprehensive understanding of the types of cost-sharing that are at the heart of most major health insurance plans. And these are people who have health coverage right now, and consider themselves a primary or secondary health-care decision maker in their family.

"It's difficult for people to understand it because it's inherently complicated," Loewenstein says. "Even if you understand each concept individually, it's still difficult to figure out the cost."

Loewenstein's research is especially relevant right now, when millions of Americans are about to begin purchasing health insurance coverage – many doing so for the first time. He worries about whether, even if the shopping experience is smooth sailing, whether consumers will actually know what they're buying.

There will be some help: Health insurance carriers are now required to include a summary of benefits, which includes relatively simple definitions of the four terms that Loewenstein quizzed his study subjects on. It includes the box below.

Still, Loewenstein is skeptical. His worry isn't so much about people having access to information, but rather that insurance is too complex to understand in the first place.

"It could lead to some perverse outcomes," Loewenstein says. "It would be much better if a future version of the Affordable Care Act mandated simplification of policies as opposed to conveying information about the policy."

In his ideal world, health insurers would only charge co-payments and eliminate deductibles, co-insurance and every other form of cost sharing. While this could cause some sticker shock - co-pays would presumably increase if they're the only way of paying for care - it would significantly simplify the system. Health costs would suddenly become predictable. A four-day hospital stay wouldn't be so confusing anymore.

"It's possible that an all co-pay plan can be kind of scary because what you see is what you get," Loewenstein says. "Some of the prices are high, of course. But in a traditional plan you're paying the same prices. You just aren't as clear about it.

Answers! Q87, 1; Q90, 3; Q5, 1;  Q3, 3

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