In this podcast, Dr. Aaron Yelowitz and I talk over our dueling papers concerning the role of the government in health insurance choice. We know that consumers often struggle with complex plans, leading to costly mistakes and inertia, even when better options exist. However, individual choice can lead to better matches to our preferences versus rigid, one-size-fits-all approaches of bureaucratic systems. Centralized choice presents a risk if government agencies have different priorities than constituents, such as budgetary savings or risk-aversion to bad publicity. Dr. Yelowitz walks through a major Medicaid program in Kentucky which shows how default assignments and opaque algorithms created both financial losses and restricted access for inattentive consumers. Can we design systems to allow consumer choice balanced with structured guidance? How might AI help simplify decisions, reducing errors while preserving flexibility to improve healthcare decision-making? Dr. Aaron Yelowitz is an Economics professor University of Kentucky, a joint faculty member in the Martin School of Public Policy and Administration, a senior fellow with the Cato Institute, and a research fellow with the Institute of Labor Economics (IZA). If you’re curious on how we choose insurance wrong (and how to get better at it), check out my accompanying post! Transcript: A Conversation about Consumer Choice and Health Insurance: Should We Trust Consumers or Bureaucrats with Our Health? Tina Marsh Dalton Welcome to Words to the WHYs on Healthcare podcast, Aaron. I’m really glad to have you. Aaron Yelowitz Pleasure to be here. Tina Marsh Dalton So, we were going to talk today — we have these paired chapters where we’re thinking about what’s the role of markets, what’s the role of the government in healthcare. But let’s start with yours. Why don’t I let you tell the title of your paper, because I feel like you’re going to give a better spin. Aaron Yelowitz So, the title of my paper, very provocatively and non-judgmentally, is, Should We Trust Consumers or Bureaucrats? The big idea in it is that one way of thinking about health insurance is that it’s a financial product. It covers uncertain healthcare expenses that may arise, and consumers, generally speaking, are not all that good at making financial decisions. Imagine that there are many health insurance plans out there. Figuring out which one is the correct one, given your circumstances and the forecasting involved, is really challenging. Tina Marsh Dalton But then the question is — you have a lot of choices. Aaron Yelowitz Yes, there could be a lot of choices, even two choices. Tina Marsh Dalton And then there’s all these pieces that are super confusing. Aaron Yelowitz Yes. So, for example, I’m sure the students in your class or in my class can understand distinctions between deductibles and coinsurance rates and maximum out-of-pockets and so forth. Take that to people who haven’t taken a health economics class, yet are economics majors or fairly literate business-wise. It’s not always obvious that they understand those kinds of distinctions, and that is just the first pass, right? Tina Marsh Dalton I actually have a story about that. I saw my cell phone ring right after I started my first job. It was an old friend from grad school, and I was so glad he was calling me. He has a PhD, he did very well, but he was calling because he had to choose his first health plan and wanted some help. And it’s like — oh my gosh, you have a PhD, and this is already complex. Aaron Yelowitz The way I liken it to my students — imagine that we were presenting in class in a language other than English. Basically, no one would be able to understand what we’re saying, and in a way, we could almost think of financial products as having a flavor like that. And that doesn’t even scratch the surface over networks and coverage, things that potentially matter. Where the hook comes in, in my chapter, would be — let’s all agree that plenty of consumers are making real mistakes, leaving money on the table. Tina Marsh Dalton Could we explain how that might be happening? Because both you and I, in both of our chapters, identify that consumers could make mistakes — so what would be an example of a mistake? Aaron Yelowitz Yes. There is a thriving economics literature, including Ben Handel’s excellent work in the American Economic Review, that basically shows a large, anonymous company that offered health plans, and partway through the study period, they updated those plans. Some of those plans no longer worked for employees in the following way: no matter how much you might spend that year, you were worse off being in that plan compared to some other plan because of the cost structure. The way we can simplify this — imagine that I was offering you a hamburger, the same hamburger, for either $2 or $3. In principle, everyone should pick the $2 hamburger because it’s the same hamburger. The amount of money that was lost by choosing the wrong hamburger — the same hamburger but more expensive — was often in the hundreds or thousands of dollars per year, and of course, that can compound year after year. This is not some people choosing a plan because they’re sicker, or others making bad forecasts. This is literally, if two hamburgers are right there, choosing the more expensive one, even though they’re the same hamburger. Tina Marsh Dalton Yeah. I’ll be referring listeners to a post that accompanies this, that is going to walk through this paper. But the idea is that the deductibles were all different, but the plan itself was the same, and when they changed premiums, people didn’t notice that they were actually paying way more in premiums than before. They could have saved money and gotten the same thing in a different plan. Other papers sometimes talk about just the number of pieces of the plan confusing the enrollees — they focus on one thing and choose the lowest of that, but the other pieces would have made a different plan better, things like that. Aaron Yelowitz Exactly. And then what Handel shows is — we might think we all make mistakes, right? You pick something and then you say, I didn’t read the terms and conditions, let me get out of that silly choice and make a different choice. What he shows in his paper is that there is a surprising amount of persistence if you home in on the traditional economic model, which says people have perfect information, they respond very quickly, and so forth. Of course, most of us, through introspection, could easily dismiss that kind of thing. How many of us have streaming subscriptions that go from one month to the next where we haven’t used the streaming at all in the last month? Tina Marsh Dalton And where, in principle, if you subscribed on your phone, you could immediately subscribe and then cancel, and it auto-cancels. Aaron Yelowitz But choice architecture — Netflix, Disney, any of those — basically wants you to auto-renew, rather than automatically canceling, where the moment you realize there’s something you want to watch, you could easily renew. So basically, lots of persistence. Tina Marsh Dalton I like that — it’s also just really hard, right? And to throw a bone to people who might be thinking this applies to them: it’s hard, and you’ve just decided there are other things in your life that you have to focus on. So the idea of, how can we make this less hard, so that people can take the extra time to make the good choice? Aaron Yelowitz Yeah, so there’s obviously an issue of rational inattention. For example, should you ponder every day how to drive from home to work? The answer might be — if it’s a particularly important day. I emphasize to my students that perhaps on the day of a midterm, you would map your route, check your phone ahead of time, make sure there are no traffic delays, that kind of thing. But oftentimes, people get stuck in their ways. I can predict after day one where each of my students will sit in their class, even though I don’t have assigned seating and even though attendance tails off after day one. Tina Marsh Dalton There are new seats available they could choose from. Aaron Yelowitz They could re-optimize, and they would all nod their head and agree with me that there is a lot of stickiness to it. So basically, the neat thing about Handel’s AER paper is that there are really two different ideas. One is that you could be asleep at the wheel — which he calls inertia — and the other is you might just have what I might consider a mistake. So imagine I said to you that the $3 hamburger is just the same as the $2 hamburger, and you say, yes, but I just want to buy the $3 hamburger. He would call that perhaps a mental error, but not inertia. And in his paper, he actually tries to tease out how much of it is one versus the other. Tina Marsh Dalton Are you asleep at the wheel versus how much of it is that you like the bright shiny object on the $3 hamburger — or it was presented to you first, and now you just cannot get off that idea? Aaron Yelowitz Yeah, so it’s a hugely influential paper, and it actually matters for the stability of insurance markets. In the canonical model of insurance markets, where you have differently healthy people — some sick people purchasing insurance and some healthy people — if you were to try to charge a premium that averaged over everyone, what we would call a community-rated premium, then the healthy people will often want to escape from the sick people, because basically they’re cross-subsidizing them. That was a big motivation behind the individual mandate in the Affordable Care Act. Tina Marsh Dalton Yeah, I like to say — who likes insurance? Sick people like insurance. Aaron Yelowitz Yes, and it’s a big win for them for community rating. But the typical economic approach would be: well, if people are awake
