Choice Architecture for Healthier Insurance Decisions

Sign-ups in online healthcare exchanges in the U.S. (also known as Affordable Care Act marketplaces) recently reached a record 14.5 million (Washington Post, January 27th, 2022).?In a new Journal of Marketing paper, my co-authors, Eric Johnson, Shannon Duncan, Tom Baker, and I investigate how the design of comparison websites affects consumers’ health insurance choices.?These design decisions, called choice architecture,?affect what insurance policies consumers choose.?The effects of choice architecture are very important with digital technology.??

Health insurance decisions are impactful for consumers.?They have strong financial consequences and determine access to potentially lifesaving healthcare.?Health insurance coverage increases longevity and decreases the probability of bankruptcy.?Getting these decisions right is also important for society because they affect firms’ labor costs and drive social justice concerns.

Health insurance choices are also very complex: They involve many terms,?like deductibles and copays,?that people do not understand.?Because of basic economics, these attributes force consumers to make complex tradeoffs: large provider networks are usually more expensive, and low deductibles require higher premiums.?Given this, it is not surprising that consumers make costly mistakes and sometimes pay too much for coverage.?Many consumers select options that cause them to pay more for equivalent benefits.?Improving these choices can make consumers healthier and broadly increase the efficiency of the healthcare system.?Our paper shows that seemingly minor changes in choice architecture can have a large effect on health insurance product choice and consumer healthcare costs.

In particular, healthcare exchanges offer promising opportunities for digital choice architectures to support consumer health insurance decisions.?Like many websites, they use two ubiquitous choice architecture tools.?First, healthcare exchanges can order the available options.?All websites make this decision.?Even an alphabetical order is a choice architecture design decision.?Second, exchanges can partition the total choice set presented to consumers by determining if a small number of initial options are presented on the first web page.?While ordering and partitioning do not always improve choices separately, we identify the conditions that allow the combination to greatly improve health insurance decisions.?This is because the effects of ordering and portioning are not independent: When options are ordered such that the best options appear at the beginning of the presented list, partitioning slightly and subtly nudges consumers to focus on the best options.?However, if the best options are not at the top of the list, partitioning discourages search and can impair consumers’ discovery of the best options.

We use one field study and three experiments to identify the conditions that allow the combination of ordering and partitioning to greatly improve health insurance decisions.?The findings can be understood in terms of fundamental decision principles.?To choose a good option, consumers must pay attention to that option and avoid paying attention to poor-quality options.?High-quality ordering ensures that good options are seen by consumers.?However, without partitioning, consumers sometimes search too much and revise which options they consider also including lower quality options.?Our process data shows that these effects are achieved by focusing consumers’ limited attention on higher quality options.?When the best options are not presented at the beginning of a choice set (e.g., with low-quality ordering), partitioning can be harmful by focusing consumers’ attention on options that are not truly superior.?

These results show that wise choice architecture interventions need to consider the joint effect of choice architecture tools as well as the quality of the firm’s user model.?Choice architecture, wisely applied, can be a relatively inexpensive and efficient way to use firm-level knowledge to improve social welfare.?Regulatory oversight might be used to prevent choice architectures that lead to worse consumer choices but this oversight will depend upon understanding how choice architecture ensembles affect consumers’ outcomes and choice processes.?We encourage firms in healthcare to use their knowledge to develop new business models using algorithm-based choice architectures that deliver longer-term value and minimize waste for customers, other stakeholders, and themselves.

Dellaert Benedict GC, Johnson, Eric J, Duncan, Shannon, Baker, Tom, (2022) EXPRESS: Choice Architecture for Healthier Insurance Decisions: Ordering and Partitioning Together Can Improve Consumer Choice. Journal of Marketing. August 2022.