What do strawberry jam and health insurance have in common?
It sounds like the opening of a (not very good) joke, but in fact the two are connected by the paradox that is consumer choice.
A seminal study into the subject found that the more choices of jam consumers encountered on a store shelf, the more likely they were to walk away empty-handed. In other words, we think we want numerous differentiated options so that we can buy the perfect jam, but, faced with all those options, we freeze. What we really want is just a simple jar of decent jam.
The jam is just the beginning. We're being offered more and more discretion in managing our finances, our retirements, our health insurance programs -- and while we might think that more choices will present the perfect individualized package for us, it may in fact just be the beginning of a whole new set of problems.
Health insurance is one area where many people make costly mistakes. Are you one of them?
The trouble with health insurance
There has never been more choice in health insurance plans. The median person enrolling in the Affordable Care Act chooses between 47 healthcare plans, and seniors considering Medicare Advantage face a similarly overwhelming plethora of options.
While you might not walk away empty-handed from the health insurance decision, you are very likely to walk away with a financially inferior option. One study into retiree health insurance choice found that giving more simplified information about costs often prompted switching, implying that the person felt they'd make the wrong choice before (people don't generally switch plans once they've picked one). Another study found that the majority of participants in Medicare Part D routinely chose plans with higher premiums and cost variance relative to other options.
These problems are by no means restricted to seniors. In a study of over 50,000 workers of a large firm, researchers recently found that most employees chose a plan that was unnecessarily more expensive than another one on offer (in this case, there were 48 to choose from).
The additional cost the average employee paid amounted to 42% of the total annual premium. In other words, the average person ended up paying almost 50% more than he or she needed to!
How do you make a health insurance choice?
Based on additional experiments, the researchers concluded that one of the key drivers of poor decision-making was "self-sorting" behavior, where participants chose plans based on deductible levels and their perceptions of their own health, rather than on the financial merits of each plan.
For example, choosing the $500 deductible plan over one with a higher deductible burdened employees with an extra $625 in premiums -- for a potential cost savings of just $226 to $500. It's almost like restricting your jam decision to the options on one shelf only. It might make things simpler, but you might also end up missing out on a far better jar.
Of course, who could blame anyone for sorting their health insurance options in this way? With close on 50 options to choose from, you have to start somewhere. Starting with a deductible and a probability of paying it before working backwards from there certainly makes sense to me.
However, as the research demonstrates, taking this approach can cost you.
Instead, next time you have to enroll in health insurance, try working the other way: for a given amount of coverage, do the math on how much you'll pay every year under various deductible levels. You might be surprised to find that you're better off setting aside the savings in your monthly premium toward funding the deductible, if it's needed.
Simple, yes, but powerful. Think of it as a better way of selecting a jar of jam -- it might take a bit longer, but it will certainly be the more satisfying over the long run.