More is less? In health insurance markets, more is more

Conventional wisdom says choosing from large numbers of options is overwhelming. Scholars call this “choice overload,” and declare that it hinders good decision-making: when faced with many options, we take a stab in the dark or simply walk away. Not so, says Associate Professor of Marketing Jonathan Ketcham.

Pity the poor consumer, bombarded each day with so many choices. Even shopping for toothpaste can find us dithering. Which size is most economical? Which flavor sounds best? Should we go for whitening, breath freshening, sensitivity relief, gum protection, tartar control or acid resistance? And if choosing from an array of $5 toothpastes is difficult, imagine the pressure we feel when facing expensive or high risk decisions.

Conventional wisdom says having so many choices is overwhelming. Scholars call this situation "choice overload," and declare that it hinders good decision-making. When faced with too many options, we just take a stab in the dark — or simply walk away. Not so, says Jonathan Ketcham, a W.P. Carey professor of marketing.

Ketcham's research is among the first to look at choice overload as it relates to real-world, high-stakes decisions. Ketcham looked for evidence of choice overload in Medicare Part D, the market in which the Medicare population buys prescription drug insurance.

"This is a market where people buy a complex product," he says. "The consumers are age 65 or above. The support tools are online. And people are typically choosing from between 30 to 60 different plans. If you'd expect to find choice overload anywhere, it would be here."

The study, to be published in the January 2015 issue of the American Economic Review, found no support for choice overload in Medicare Part D. "To the contrary, adding more options actually increased the rate that people switched plans, unless the plans were quite a bit more expensive than others, in which case people just ignored them." And, when people switched from one Part D plan to another, they saved themselves money, Ketcham found.

In a jam

The effect of choice overload on consumer decisions began with a psychology study involving jam. "The most famous study put jams in front of shoppers at a grocery store and found that when people were offered 24 different kinds of jam, they were much less likely to choose one to buy at the store that day than when they were offered 6," Ketcham notes.

The choice overload hypothesis makes three main predictions. There's the inertia component, which holds that people can become so overwhelmed by options, they're likely to make no choice at all and stick with their status quo to their own detriment.

There's a confusion component, which supposes that having too many choices will cause people to choose worse, also costing them money. Finally there's the satisfaction component: even if a consumer does make a choice, the abundance of options available raises expectations to the point that no choice fully satisfies.

With prescription drug insurance, most consumers were faced with 30 or more plan options under Medicare Part D. One might expect seniors to have skipped buying a plan altogether when the prescription drug coverage became available in 2006. For many experts, the jam study was definitive. For example, in their best-selling book "Nudge: Improving Decisions about Health, Wealth, and Happiness,” Richard Thaler and Cass Sunstein devoted an entire chapter to Part D.

They declared widespread confusion and asserted that "offering people forty-six choices and telling them to ask for help is likely to be about as good as no help at all" (p.163). Likewise Paul Krugman wrote in early 2006 that the large number of private insurers made Part D "extremely complex and obscure. It is virtually impossible for most people to figure out which of the many drug plans now on offer is best."

Still, Ketcham questioned whether "jam options in a field experiment really tell us how to design health insurance markets." He pointed out that a spate of research in other contexts had found no evidence of choice overload.

"We already knew that 90 percent of people have prescription drug coverage, and 85 percent report high satisfaction. Both of those facts run counter to the basic predictions of choice overload," Ketcham says. "With this study, we wanted to dig further to see if too many options made people less likely to move to a different plan for next year, causing them to ignore better plans and leave money on the table."

Weighing the costs

Ketcham set out to close the gap between what he calls rhetoric and research. To do so, he had to learn the nuances of the regulations and figure out what people would have spent in every available plan. To get the answer, he partnered with Christopher Powers, the Director of Information Products at the Centers for Medicare and Medicaid Services.

This government organization administers the prescription drug insurance program and collects all the required data, including all the plans' designs and all of the prescriptions that each person filled. Ketcham relied on these data and Powers' expertise to develop a cost calculator that would tell them what people would have spent under every plan available to them.

Ketcham explains, “Essentially we had to develop a method to figure out what being an alert, cost-conscious shopper would look like for each person each year.” This cost calculator allowed Ketcham to discern which plan would have been cheapest for each person. With that, he defined the person’s potential savings as the difference in the cost of the plan the person actually chose and the cheapest plan available to them.

"The conventional wisdom," Ketcham says, "is that people are inert and not alert. They are overwhelmed with choices and so don't pay attention to their options, staying put in their old plan each year and leaving money on the table."

Researchers had previously claimed that inertia was prevalent in this market, but after tracking the market for several years, Ketcham found plenty of turnover. "Overall, among people who joined the market from 2006 to 2009, only half were in original plan by the beginning of 2010," Ketcham says.

"When people had more plans available to them, they were more likely to switch plans. And when they switched plans, they saved money. On average, they saved more than $200 a year." Do people select the cheapest plan? "No," he continues, "and the reason is that people care about more than just money when it comes to insurance."

According to Ketcham, it's not just low prices that people are concerned about. They also seek risk protection and customer service. If you get sick unexpectedly, will the plan cover the needed drugs? Can you get claims filled without hassles or denials? Are calls answered promptly or do you wait on hold interminably? Are mail-order prescription refills available? Those are the kinds of additional considerations people weigh when evaluating a Medicare Part D plan.

"We shouldn't expect that smart consumers would typically choose the cheapest plan," Ketcham says. He adds, "In ongoing work with my W.P. Carey colleague Nicolai Kuminoff, we are taking a more thorough look at how well people choose prescription drug insurance. This work will also help us learn how people weigh costs against all of the other important aspects of drug insurance."

From research to policy

That's why when people cite choice overload as a reason to restrict choices in the name of consumer protection Ketcham winces. "We're seeing efforts by influential academics to move psychology and behavioral economics into public policy," Ketcham says. "What's been missing is research on how, and how well, people actually make important decisions in markets."

Certain experts say government regulators should help consumers make better choices by limiting the number of available options. For example, Jonathan Gruber also researched Part D and stated that "Consumers simply err ... due to a lack of cognitive ability," and the complexity of facing so many options.

On that basis Gruber concluded, "... consumers would be better off if there were less scope for choosing the wrong plan." Another leading proponent of restricting choice is Barry Schwartz, author of "The Paradox of Choice: Why More is Less." Professor Schwartz weighed in on Medicare prescription drug plans specifically, saying "when there are a large number of plans from which to choose, decision-making quality suffers … because the relevant features are too complex to evaluate."

But then he tried to back away, saying, "Has anyone ever suggested that the sensible alternative to too many options is a single option? Absolutely and unequivocally not." Ketcham says Schwartz was mistaken. A prior article authored by influential academics and members of the current federal administration called for exactly that.

They recommended the government establish "regional monopolies," where only a single company could offer drug plans, "much like utility companies of the past," says Ketcham. But Ketcham's research found that adding plans to the market didn't dampen people's attention but in fact increased the odds that they would switch to a different plan.

The study demonstrates that people choosing Medicare Part D plans are not overwhelmed or confused by too many options. Instead, consumers pay attention to cost and choose new plans when their current plans become more expensive than the others available.

Ketcham concludes, “People looking for a justification to restrict consumers’ choices will have to look elsewhere.” Now, aren’t you glad you chose to read this article instead of the millions of others out there?

Read more: Can Medicare patients decipher prescription benefit?  

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