The importance of shopping around in the U.S. health insurance market

Even well into the age of Google, search can be a difficult activity. Buying a car, looking for a job, or even figuring out the cheapest flight for vacation can get complex quickly. These problems are further compounded when we’re trying to shop around for extremely important and costly, health care services. The question of how consumers actually search for health insurance is very important given the creation of marketplaces for prescription drugs (Medicare Part D) and overall health insurance (the Affordable Care Act) in the past several years. A new paper shows that if consumers invested a greater amount of time comparing different plans- and thus shifting to those that are most cost effective, it could help reduce the premium for health insurance.

Let’s first look at Medicare Part D, a program created to help increase prescription drug choices for seniors. The idea was to give seniors more options—good in and of itself—but also to contain costs. Research finds that the actual costs for the drugs paid for by insurance plans did decrease since the implementation of Part D, but also that the decrease doesn’t appear to be showing up in the form of reduced premiums paid by seniors.

Why exactly that pass-through hasn’t happened is the question answered in a new paper by economists Kate Ho and Joseph Hogan of Columbia University and Fiona Scott Morton of the Yale School of Management. The authors focus on how insurance plans change premiums based upon the movement of seniors from plan to plan.

The idea is this: If seniors are inattentive and less likely to switch plans due to price changes, the insurers will notice and raise the price. The inaction by seniors signals to the plan administrators that these people are less sensitive to changes in prices. So the plans will raise prices, premiums go up, and profits per consumer increase.

Using data from Medicare Part D recipients in New Jersey, Ho, Hogan, and Scott Morton then try to figure out how much premiums would decline if seniors had less inertia and were more likely to shop around. According to their top-line result, the average senior would save $536 over the course of three years– or about 40 percent of the estimated “over-spending” per enrollee in Part D. Increased movement and shopping around would also have an effect on the fiscal cost of the program: an estimated decline of 8.2 percent of the cost of subsidies.

Of course, this research has implications beyond Part D. The Affordable Care Act depends upon a marketplace to bring down premiums for health insurance. Understanding how to best help adult customers of all ages navigate the changing prices of plans will become increasingly important. As the authors point out, a lack of pressure on insurers via “effective consumer choice” can make these kind of programs far more expensive than they need to be.