Americans Lack Clear Understanding of Health Insurance Basics

August 1, 2013

Health insurance basics explained by agent

Americans do not understand the basic aspects of health insurance, which inhibits their ability to make appropriate coverage decisions, a recent study found.

Researchers at Carnegie Mellon University surveyed 202 American adults and found that only 14% accurately understood four basic concepts in health insurance: deductibles, copays, coinsurance and out-of-pocket maximums. When researchers asked the participants to calculate how much a hospital stay would cost given a sample plan, only 11% were able to correctly calculate the amount.

This percentage was actually higher than what study author George Loewenstein, Ph.D., an economist at Carnegie Mellon in Pittsburgh, Pa., anticipated. Loewenstein said he’s “always been bewildered about why health insurance is so complicated that even highly educated people have a difficult time understanding it.”

The study’s results are particularly troubling, as many more Americans will have a greater range of insurance options with the Affordable Care Act (ACA) taking effect. Previous studies have shown that consumer choice should incite competition between providers, ultimately pushing prices down and improving quality. But if consumers don’t properly understand the aspects of different plans, they won’t make proper decisions to create this effect, and insurance will not improve.

Following the first survey, the researchers, who collaborated with insurance professionals on the study, devised a simpler insurance plan that only used copays, eliminating deductibles from the equation. They then asked study participants to decide on several hypothetical healthcare decisions, using the simplified plan and using the original, more complex plan.

When participants used the simplified plan, they were better able to understand what various procedures and visits would cost them, and they showed a preference for the lower-cost options. For example, insurance plans often incentivize certain behaviors, such as going to an urgent care clinic instead of an emergency room to address an earache. Often, the incentives are “self-defeating” because people don’t understand them, so they can’t respond to them, Lowenstein said. But under the simpler plan, the incentives worked.

In fact, “a fraction of people were actually willing to pay a higher premium in exchange for the simplicity,” he said.

This is because people are uncomfortable with uncertainty, and not knowing how much one would have to pay in the event of a health problem adds more stress to an already stressful prospect, said Ellen Meara, Ph.D., a professor at the Dartmouth Institute for Health Policy and Clinical Practice. Understanding healthcare not only saves consumers money—studies have shown that people who have a better understanding of their policies fare better health-wise, said Susan Pisana, vice president of communications for America’s Health Insurance Plans, a trade association representing the health insurance industry.

In order to improve people’s understanding, the ACA sets some new regulations for how insurers must explain their policies to consumers. This includes using standardized definitions for various terms and providing these definitions to consumers.

Loewenstein said he thinks the ACA missed an opportunity to fix the problem of lack of understanding. “Instead of providing simple information about something that’s inherently complicated, it would have been better if the ACA had mandated simpler insurance,” he said.

When given a simpler plan, people made more informed decisions about their healthcare.

Here’s a quick explanation of the four basic concepts the researchers asked study participants to define:

Deductible: The amount a consumer must pay in a fixed period—usually a year—before the insurer starts to make payments for the consumer.

Copayment: The fixed dollar amount that an insured individual will pay when a medical service is received. The copayment may vary based on the service.

Out-of-pocket maximum: A dollar amount, which is the maximum an insured person is required to pay during a year. The insurance carrier pays for all expenses if this amount is reached.

Coinsurance: This is a percentage amount that the insured person will pay to cover a medical expense after the deductible amount. Once the insured person has paid both the deductible and the coinsurance, the insurer will cover other charges. The percentage may vary due to the service, or whether the provider is in-network or out-of-network.

By Susan E. Matthews, Everyday Health Staff Writer