• Search frictions should not exist in the information age

    Yesterday, I devoted two posts to “search frictions”, the idea that selecting among complex health insurance products is hard to do efficiently. Aaron and I both noted the Administration’s proposed new insurance labeling that is supposed to help solve this problem, though I agree with Aaron that it likely won’t do very much.

    I assert that making a good choice among health plans is a problem that should not exist, not in the information age anyway. What makes it hard is that we try to do it with human brains, which are not equipped to handle the high dimensionality of the problem. This is not just about the complexity of health plans, and they are complex. It is about the complexity of one’s own health care too. The problem one has to solve is to find, within the diversity of plan options, one that works well given the nature of one’s health utilization and that of one’s family.

    I recognize that this is an easy problem for some people. For “young invincibles”–like single 20- and 30-somethings with no heath issues–the problem is one-dimensional. Pick the plan with lowest premium or don’t pick a plan at all and go uninsured. Not necessarily smart, but easy!

    Others don’t have a plan choice. Their employer picks a plan and workers are stuck with it.

    But some do have choices, whether through their own employer or due to the combination of offers from their employer and their spouse’s. Medicare beneficiaries have a tremendous number of choices, something like 30 drug plans alone, plus a handful to a dozen or more comprehensive Medicare Advantage plans, plus supplements, and, in some cases, employer retiree benefits. It’s no easy task to handle this degree of choice.

    I have choices through the FEHBP system. Last year, when I tried to work on the problem of which would be best for my family I was flummoxed. Why? Because I didn’t have a firm enough grasp of my family’s health utilization. Or, if I did, it was monstrously hard to interface it with the dimensions of health plan variation in a meaningful way. What would be the copays for our specific medications? Are all our doctors in the network? Our preferred hospital? What was our overall spending? What proportion would have been in the deductible range? Which plan would really give us the best value for our money?

    Yes, those are all answerable questions, but only with a tremendous amount of work. Like many people, I gave up and just stuck with what we have now. Status quo bias. Search frictions. Call it what you will, but it is a problem that need not exist because …

    … we have computers (duh). And computers are good at this kind of thing. If only I had a complete record of my family’s medical use in electronic form to which I could apply, with a few mouse clicks, the various plans available to me. The result could be a personalized report that lists which physicians and hospitals we use are in a plan’s network and how much it would cost us (premium + cost sharing) if we enrolled in each plan, based on past utilization. Oh what a wonderful world that would be. The choice would be easy. No status quo bias. No search frictions. (An employer, with access to its workers’ utilization, could do this too, though it’d be optimizing over the workforce and would not necessarily be optimizing workers’ costs but, rather, the firm’s costs.)

    The obvious problems are (a) we don’t yet have an electronic system in the US with which to record all medical use and (b) privacy concerns. Neither of these is insurmountable, but both are hard. The first due to the fractured and immature nature of current electronic medical and personal health record systems. The second due to … well, it’s privacy, something that always freaks Americans out.

    I’m not saying there aren’t important privacy issues. There are, just as there are problems with existing technology. What I am saying is that there are solutions to the plan search problem. The best one may not be found using our own brains. In the 21st century, it’s the wrong tool.

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    • Hi Austin, this is a great summary, my family also is on FEHBP, and I’ve gone through the same exercise as you a few times, each time when something changed in year to year expectations of my family health care needs. Three points I would like to add.

      First, my problem (just me and my wife) is simpler than yours, with mostly separate pediatric care in our health care world, a whole aspect of these plans is irrelevant to me, a pet peeve of mine, we could ask what manner of plan evaluation inefficiencies lie in the completely confused idea of the “family health plan”. No one tries to sell family life insurance.

      Second, despite this simpler issue, just me and my wife, who both have the same primary care physician, it STILL was difficult. It’s almost impossible to gather and be able to compare all the information even when the problem isn’t hard.

      Third, as someone who’s been on FEHBP for almost 20 years, every single time when we’ve had health events they were unexpected, uncertain, that was the issue for me, I only considered making changes the year after the uncertain events happened. And while the probabiliities changed, and some issues have become “chronic” in that their spending carries over year to year, the key issue as I look back always seems to be “what coverage did I have in the year of the health shock”.

      So, while I’d love to have access to what you propose, I’d rather think about these three problems.

      Jim

      • There are life insurance policies that insure a couple, jointly. Don’t recall the terminology. Otherwise LI and HI are so different I don’t think comparison is that meaningful.

    • Nice post

    • My hope is that the exchanges, if done right, would reduce these frictions a lot. Plans should be listed at a website where you can have direct side-by-side comparisons. You should be able to input your family size and illnesses and get cost comparisons. There should also be some way to account for geographic limitations. Some people won’t and some can’t go very far for their care. This happens a lot more than most policy makers seem to realize.

      Steve

    • All of the information about co-pays and networks is good to know. But to me what really matters is how the insurer is going to be about coverage decisions in the case of a serious health crisis – cancer, etc. Are they going to be generous or try to restrict access to the most advanced therapies?

      And this is truly impossible to assess as a consumer making a purchase decision.

      If we end up moving towards a Paul Ryan style system it would be critical to give consumers the tools to understand this. As a wonk, one can envision how it might work – insurers could publish their $$/QALY limits and let consumers make their choices. But it seems impossible politically to think that such a scheme could fly.

    • Great post. Your description of what was needed for somewhat optimal choice sounds clearly frustrating. Although, when an answer becomes too complicated, I start to question the question. What exactly is the benefit of choice between deductibles, copays and out of pocket maximums GIVEN the same actuarial value of the plan?

      If the exchanges get the % of expected cost right this should be the case. And, if there is no benefit, then a standard should be set for the sake of consumers. I’d just assume have insurers competing on something other than how people perceive various budget constraint kinks.

      • Yes!!! I’ve wondered along these lines myself. In trying to find an “optimal” plan for me I’m merely trying to take advantage of my information asymmetry over the plan. Or, if not that, my idiosyncratic use pattern over what the plan is designed for on average, which stems from the impracticality of truly personalized health plans and the fact that the plans are “insuring” against persistent phenomena, not true, random shocks.

    • Hi

      Unfortunately, much of the economic arguments in “Unhealthy Markets…” are out of the scope of my training and experience. However, I am curious why there is no mention of Kenneth Arrow’s paper on information assymmetry – a brief reference could establish the 50+ year timeline on accepting these conditions in health insurance markets.

      Keep up the good work at TIE – it is now has moved to first place on my morning reading, moving the New York Times to second place.