What US health insurance teaches us about consumer behaviour

How bad would the customer service at your bank have to be for you to switch to another?  How long would you have to sit in a waiting area, reading bad magazines, before you would look for a new doctor?  How about switching health insurance plans?

At the foundation of economics is the premise that people make rational choices, based on the information they have. This may be true, but as a decision becomes more complex, so does our desire to avoid it. According to the literature on economic behavior, this phenomenon is known as consumer inertia.

As Stigler and Becker (1977) state: “the making of decisions is costly, and not simply because it is an activity which some people find unpleasant. In order to make a decision one requires information, and the information must be analyzed. The costs of searching for information and of applying the information to a new situation may be such that habit is often a more efficient way to deal with moderate or temporary changes in the environment than would be a full, apparently utility–maximizing decision” (pg. 82).

Inertia is related to the idea of status-quo bias, which posits that individuals facing a decision will stick with the status quo (doing nothing) and maintain their current choice more often than they will decide to change (Samuelson and Zeckhauser (1988)).

These concepts have been famously demonstrated in studies that showed enrollment in 401(k) savings plans remains significantly higher when employees are automoatically enrolled than if they are left to decide their enrollment status on their own and that setting an “opt-out” option for organ donation rather than an “opt-in” option dramatically increases donation. In both cases, people selected the default option.

This research is now being revisited with the insurance plans offered under the Affordable Care Act (Obamacare) in the United States. Inertia, according to a New York Times article, “is even stronger when it comes to insurance than many other markets, because people find shopping for a health plan to be so confusing and unpleasant. There are also real trade-offs in changing health insurance — a better premium may come at the cost of your favorite doctor, for example.”

Under the Affordable Care Act, individuals can shop for private insurance plans online, and providers compete on price and features. People can switch plans every year if they want. Otherwise, they will continue with their current plan under a default renewal setting. Despite the numerous reasons to shop around each year— from new plans with lower premiums to those with lower deductibles or co-payments— most people do not return to the ACA website to see what is available. Instead, most follow the law of inertia and stick with what they already have.

This may be bad news for the overall insurance marketplace. A high number of auto-renewals does not encourage insurance providers to offer competitive rates, rather it incentivizes them to capture individuals the first time they visit the site and then gradually raise costs each year.  This is because, presumably, people will look for the best-priced plan when they sign up and then forget all about it for the next few years.

In response, the Obama administration has floated the idea of switching the default to one that would automatically move individuals to a cheaper plan instead of keeping them on their current one. This would fight inertia, but it might also surprise some people when they find out their plans were switched while they weren’t paying attention.

So are there other, less shadowy, solutions? James Surowiecki writes in The New Yorker that, “More information is a start.”  Surowiecki goes on to describe a study Ben Handel, an economist at Berkeley, conducted which found that “fully informed” consumers saved a couple thousand dollars compared to those who were less informed.  Accordingly, providing personalized rankings of insurance plans could inspire some individuals to change plans as they would be able to quickly and easily compare plans, removing some of the complexity involved. This solution wouldn’t please insurance providers, but it would lower the cost of the program for taxpayers.

People are able to change their minds easily and quickly when the decision at hand is simple.  However, if the decision involves sifting through a lot of information or high energy/time costs, they only change if and when something compels them to do so. They key, then, is not just in defaults, but in providing easy-to-understand information.

This article was first published by the World Bank’s People, Spaces, Deliberation blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Roxanne Bauer is a consultant to the World Bank’s External and Corporate Relations, Operational Communications department (ECROC).

Image: A nurse poses for a photo in a trauma center of the University of Mississippi Medical Center in Jackson, Mississippi October 4, 2013. REUTERS/Jonathan Bachman.