by: Ming Pei
People often have great difficulty choosing the best healthcare plan and treatment because of the limited healthcare price transparency and the energy cost to find a better healthcare plan. Professor Ben Handel at UC Berkeley used the data from the large employer-sponsored insurance system and conducted research to find that consumer inertia causes an average employee to forgo $2032 annually. Professor Handel also found that many people tend to stay with their default option, even if it’s not the optimal plan for them. Consumer inertia explains that “customers just tend to put up with poor service and results, as long as it doesn’t get too bad” (Shephyken). Because consumers are mostly not well informed, consumer inertia in the healthcare industry has generated a welfare loss.
This consumer inertia comes from many aspects of complexities in the healthcare industry. Firstly, there is no standard price for a certain surgery. Different hospitals set their own prices. Prices also depend on the negotiated contract between hospitals and insurance companies. These contracts will determine how much insurance companies can reimburse hospitals. From the patient’s side, the amount they pay out of pocket will depend on their deductible, copay, and coinsurance. These factors make it harder to set a price on a certain medical treatment. Secondly, different patients will go through different medical procedures which is hard to settle down the price before the whole procedure is done. Thirdly, it’s hard to change customers’ mindset to let them know that the healthcare industry is no different from the other marketplaces.
For example, once a person decides to accept treatment by their physician, it’s more likely that they will choose the insurance plan based on their physician’s recommendation. Physicians’ decisions are very influential. However, very few people will spend lots of time comparing different physicians, similarly to what they would do when buying a new car. Getting a different insurance plan often means changing to another doctor, which is undesirable. Despite the lack of transparency driven by the market, legislations don’t largely support price transparency. Providers, insurers, and drug makers are not willing to disclose the prices. The Affordable Care Act added another layer of complexity to consumer inertia: tax and subsidy. The Affordable Care Act also requires consumers to automatically enrolled in current healthcare plan next year if they don’t tend to make any changes to their current plan, which makes consumers more sticky to the current plan. These different factors all contribute to the existence and continuity of consumer inertia in the healthcare industry.
Despite the consumer inertia, consumers all want more information on the quality and prices of the service they receive. Investors pour a lot of money into healthcare transparency companies; for example, Kaiser has a price estimator tool. However, there is a relatively small audience who know and utilize the existence of these agencies and their price estimator tools.
While price transparency seems favorable and beneficial for both consumers and the industry, it may also incur adverse selection problems in a macroeconomics perspective. Adverse selection in healthcare market means that sick people tend to invest more in their insurance plans while healthy people want to opt out of their expensive health plans, which will lead to a pool of insured people who are mostly sick people. This will lead to higher premiums for consumers and greater financial risks for insurance companies. Professor Handel finds that if consumer inertia is reduced, adverse selection would be more likely to increase and less risk adjustment between the sick and healthy people will be made. Therefore, whether consumers should be well informed about the marketplace is still under discussion.
Data shows patients with high deductibles are more likely to shop and compare different insurances. But in his study, Professor Handel finds that patients who face with a high deductible will not shop for a better deal, but instead, will use less healthcare. High deductibles did help to lower overall healthcare expenditure, but they may also lead to sicker patients rather than smarter shoppers.
Overall, we see consumer inertia existing commonly in the current healthcare industry, revealing the necessity of letting consumers be more informed about what is happening in the market. But whether we should reduce consumer inertia, and what kinds of reforms our government should work on are still open to discussion.
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