How well do you understand health insurance?

An informed consumer is one who can make the best decisions. But when it comes to health care, according to recent research, consumers don’t have a thorough understanding of health insurance.

This, researchers concluded, means the likelihood is small that consumers will make smart decisions this fall when state-based health plans become available under the 2010 Affordable Care Act (ACA).

The research, published in the August issue of Journal of Health Economics online, was based on two surveys that came from representative samples of Americans between the ages of 25 and 64. Survey participants had private health insurance, and were the primary or shared decision-maker for their own or their families’ health care.

The first survey was designed to determine how well insurance holders understand four basic traditional health insurance terms: co-insurance, copay, deductible and out-of-pocket maximum and how well they believe they understand these concepts.

Survey responses revealed that while participants felt confident about how well they understood these terms, their actual understanding was much lower. In fact, only 14 percent of all respondents accurately understood all four concepts.

The first survey also showed that only 11 percent of participants presented with a  traditional insurance plan incorporating all four terms could actually compute the cost of a four-day hospital stay when given the necessary information.

Finally, the survey found that a simplified insurance plan that got rid of copays and deductibles, the two least understood components of insurance plans, would appeal to consumers.

“It is strange, in my opinion, that the insurance market has evolved so, that so few individuals understand the fundamentals of the medical insurance plans they are insured under,” says lead study author George Loewenstein in a statement.

“Insurance plans incorporate all sorts of incentives designed to encourage customers to make specific types of decisions. What is the likelihood that they are going to respond to these incentives if they can’t understand the most basic elements of plan design?” asked Loewenstein, the Herbert A. Simon University Professor of Economics and Psychology at Carnegie Mellon University in Pittsburgh.

For the second survey, researchers worked with insurance professionals on the research team to design a simplified insurance plan using only copays and no deductibles, which was later marketed to the insurer’s customers. The second survey then compared respondents’ ability to compute costs under the simplified plan compared with the traditional insurance plans and asked their preferences between the two. It also asked respondents to make hypothetical health care decisions such as where to go for an earache—to the emergency room or an urgent care clinic. Both plans had the same premium.

Analysis of the second survey results revealed that respondents were more likely to make lower cost choices such as going to an urgent care clinic under the simplified plan and were better able to understand what the cost implications were under the simplified plan.

“The ACA deals with the problem of consumer misunderstanding by requiring insurance companies to publish standardized and simplified information about insurance plans, including what consumers would pay for four basic services,” said Loewenstein.

“However, presenting simplified information about something that is inherently complex introduces a risk of ‘smoothing over’ real complexities. A better approach, in my view, would be to require insurance companies to offer truly simplified insurance products that consumers are capable of understanding,” he added.