The paper in Marketing Science by Carey Business School Associate Professor Jian Ni proposes a remedy that could guide chronic-illness patients to the appropriate level of care and thus reduce the costs to them and health insurers, helping to lower the nation’s ballooning health care bills.
Ni and his co-authors say their paper breaks new ground on this topic by mining a broader data set than was available to previous researchers, enabling a more detailed view of consumers’ health plan decisions over multiple years.
They had access to three years of detailed data from an unnamed health insurer that offered Preferred Provider Organization plans ― basic, medium, and comprehensive ― to customers through their employers.
Going from basic to medium to comprehensive, the annual premium increased, but the deductible, co-insurance rate (the percentage of expenses the consumer owes after paying the deductible), and out-of-pocket maximum decreased.
The researchers focused on the nearly 3,000 chronic-illness sufferers who bought individual care plans during the 2005-2007 period covered in the study.
Some 133 million Americans are afflicted with chronic maladies, the most common of which include heart disease, cancer, hypertension, respiratory diseases, diabetes, Alzheimer’s disease, and kidney disease.
Preventive care for such illnesses would include diagnostic tests and drugs that keep the patient’s condition from worsening. Curative care would include surgeries and drugs that, while expensive, provide a major boost to the patient’s health.
In the study, Ni and his colleagues found that about 14 percent of the people who would have been a good match for a medium plan and preventive care ― that is, they were in moderate health, though they felt uncertain about their health status, and price wouldn’t likely be a factor in their purchasing decisions ― nonetheless chose the more costly comprehensive plans and curative care.
As Ni notes, this is a classic example of a “moral hazard,” when a risk taker is largely unaffected by the consequences of the action. In this instance, a health care consumer doesn’t mind choosing a more costly care plan, however unnecessary, because he knows that the insurer will pay for the bulk of it.
“Certainly some people with more serious conditions will benefit from a comprehensive plan and curative care, but the 14 percent in our study pose the kind of moral hazard that contributes to health care expenses in the U.S. that are higher than they probably should be, roughly a fifth of gross domestic product,” Ni, an expert on the impact of consumer behavior on firm strategies, said in an interview.
Giving customers better information could go a long way toward easing the problem, the paper suggests. With clearer instruction and guidance from their physicians and insurers, consumers could develop the habit of choosing plans that would more properly fit their health status. The moral hazard would be mitigated, and the costs to customers and insurers alike trimmed.
The paper, “A Dynamic Model of Health Insurance Choices and Health Care Consumption Decisions,” was derived from Ni’s doctoral dissertation. His co-authors are Professor Kannan Srinivasan of Carnegie Mellon University, Professor Baohong Sun of the Cheung Kong Graduate School of Business, and Associate Professor Nitin Mehta of the University of Toronto.