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Consumers likely to make costly mistakes when buying on exchanges Posted: October 10th, 2013

By Beth Orenstein

Beth Orenstein is a freelance writer from Northampton, Pa. A graduate of Tufts University, she covers health topics.

A research team from Columbia Business School expects that more than 80 percent of consumers who buy their health insurance through the new government-run exchanges will choose plans that are more costly and have more benefits than they really need.

Tens of millions of Americans are expected to shop for health insurance through the exchanges, also called marketplaces, which opened Oct. 1. Under the Affordable Care Act, almost everyone must have health insurance in 2014.

According to the Columbia Business School's Center for Decision Sciences, consumers will overpay by about $611 on average because they fail to choose the most cost-effective option for their needs.

Professor Eric Johnson, co-author of the report and co-director of the school, says the mistakes could add up to $9 billion.

Competition needed to keep costs down

The problem impacts more than consumers' pocketbooks.

"If consumers can't identify the most cost-efficient plan for their needs, the exchanges will fail to produce competitive pressures on healthcare providers and bring down costs across the board, one of the main advantages of relying upon choice and markets," Johnson says in a press release.

Johnson, who studies how consumer behavior applies to public policy, says that his research is not an argument against the Affordable Care Act but meant "to underscore the difficulties and complexities in creating the actual delivery systems, which is being done in both blue and red states."

He also suggests that the exchanges could improve outcomes for the consumer with education. He recommends the websites for the exchanges:

  • Include tutorial links and pop-ups that explain basic terms such as deductibles and copays.
  • Add a calculator for consumers to use when choosing plans.
  • Implement "smart defaults," tools that default to the most cost-effective plan by 20 percent.
  • Limit the number of choices to help avoid confusion. Utah, the study notes, offers 99 health care options for participants.

Financial incentives not the answer

Consumers, Johnson advises, should consider their family's needs and estimate their medical services before choosing a plan. Doing so will increase the chances of choosing the best plan, he says.

Johnson says he was surprised to find that providing monetary incentives alone did not improve outcomes. Study participants were offered $1 for every correct answer. They also received an entry into a lottery where they could win $200. Yet 79 percent of the participants still chose the wrong plan.

The researchers based their study on stimulated exchanges that were modeled on the design of the actual exchanges. Their research was titled: "Can Consumers Make Affordable Care Affordable? The Value of Choice Architecture." It was published at the end of September just before the exchanges opened to the public.