{"id":7748,"date":"2012-10-24T09:38:15","date_gmt":"2012-10-23T23:38:15","guid":{"rendered":"http:\/\/blogs.unsw.edu.au\/knowledgetoday\/?p=7748"},"modified":"2012-10-24T09:38:15","modified_gmt":"2012-10-23T23:38:15","slug":"insurance","status":"publish","type":"post","link":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/blog\/2012\/10\/insurance\/","title":{"rendered":"When Insurance Buyers and Sellers Speak Different Languages"},"content":{"rendered":"

From the\u00a0Knowledge@Wharton today\u00a0blog<\/a>.<\/strong><\/p>\n

The often oddly illogical behavior of insurance buyers and sellers has long fascinated Wharton health care management professor Mark V. Pauly<\/a> and his colleague Howard Kunreuther<\/a>, Wharton professor of operations and information management.<\/p>\n

During their decades-long collaboration on market studies, the two compiled notes on the ways that insurance companies, consumers and regulators get it wrong \u2014 Pauly describes it as \u201ca rogue\u2019s gallery of insurance anomalies.\u201d That collection ultimately became so substantial that they turned it into journal articles and then into a book titled, Insurance & Behavioral Economics: Improving Decisions in the Most Misunderstood Industry<\/em>, to be published in December.<\/p>\n

Why \u201cmisunderstood?\u201d In an interview in the LDI Health Economist<\/em>, a publication of the Leonard Davis Institute of Health Economics<\/a> at the University of Pennsylvania, Pauly identified some of the reasons insurance buyers and sellers misconstrue each other\u2019s intentions and responses so frequently. Topping the list is consumers\u2019 widespread uncertainty about predicting risk or estimating probability, and a time-lag sense of entitlement to things that weren\u2019t actually purchased in a transaction.<\/p>\n

\u201cInsurance is a contract where you pay your money up front and then whatever you\u2019re going to get from it, you get later on,\u201d Pauly said. \u201cBut just like a pre-paid vacation, that can be a recipe for frustration: People arrive at the hotel and believe they are entitled to free Mai Tais even though the fine print of their confirmation says they\u2019re not. The thing I think people do understand \u2014 but want to pretend they don\u2019t understand about insurance \u2014 is that if you didn\u2019t pay for it and it was not specifically in the contract, you\u2019re not entitled to it. Once consumers have paid their insurance premiums, many really do want to think they\u2019re entitled to be paid for anything bad that happens to them.\u201d<\/p>\n

Insurers, Pauly said, \u201chave just the mirror image. They see themselves as promising a certain number of things for a certain amount of money; and if you didn\u2019t pay them for it, they shouldn\u2019t be required to deliver it to you.\u201d<\/p>\n

However, he pointed out that the book doesn\u2019t just target consumers\u2019 foibles. \u201cThere\u2019s plenty of blame, stupidity and irrationality to go around\u201d for insurers and government regulators as well, he noted.<\/p>\n

\u201cWe\u2019re aiming this book partly at scholars and partly at people in the insurance industry who are sometimes inept in explaining what they do and why,\u201d Pauly stated. \u201cWe say, \u2018You\u2019re often as irrational as consumers even though you have much more at stake.\u2019 Hopefully, the book will make insurers think more carefully about what they do and also give them a little bit of defense for some of the things that need to be explained to consumers, regulators and policy types.\u201d<\/p>\n

Another goal of the book is to establish a benchmark for good insurance performance, then explore how various markets succeed or fail at meeting that benchmark.<\/p>\n

\u201cThe majority of insurance dollars spent in the U.S. are spent in markets that are functioning fairly reasonably, but there are some markets where it\u2019s totally nuts,\u201d he said. The book makes an effort to compare the two different kinds of markets to identify characteristics that predict potential problems\u2026. The book not only discusses anomalous insurance markets, it also discusses non-anomalous insurance markets because it wants to identify the characteristics that tend to predict anomalous behavior.\u201d<\/p>\n

One of the markets the authors scrutinize is health insurance, and their conclusions may surprise many.<\/p>\n

\u201cI don\u2019t feel as bad about health care insurance after writing this book as I did before,\u201d said Pauly, \u201cbecause compared to a lot of other insurance markets, it\u2019s not nearly as messed up. The kind of insurance sold even before the Affordable Care Act [ACA] provided pretty good coverage against low probability catastrophic events, which, in this case, is the potentially bankrupting circumstance of becoming a hospital in-patient.\u201d<\/p>\n

Health insurance performance behavior \u201cwas better than other kinds of insurance,\u201d he said. \u201cFor instance, in terms of flood insurance, a consumer could say, \u2018It will never happen to me because I haven\u2019t seen a flood in my neighborhood in quite a while.\u2019 But they do see catastrophic health events often enough to know that these aren\u2019t that low a probability. So, from that point of view, health insurance looks better than average.\u201d<\/p>\n

One of the things the ACA is trying to address is that \u201cif you buy your health insurance as an individual, there are really high administrative \u2018loading\u2019 and selling costs,\u201d Pauly pointed out. \u201cBut the percentage of that for health insurance is about the same as other kinds of insurance people buy as individuals, like auto collision or homeowner coverage. That doesn\u2019t mean it\u2019s either bad or good. It just means that the imperfection and waste in the individual insurance market isn\u2019t something unique to health insurance. It seems shared by virtually all insurances that people buy on a one-on-one basis.\u201d<\/p>\n

Pauly notes that many economists have their doubts about the ACA\u2019s health insurance exchanges \u2013 competitive marketplaces designed to allow patients to buy insurance directly from a pool of different health plan options. He tells an economist joke to make his point: An economist and non-economist are walking down the street when the non-economist says, \u201cThat looks like a $20 bill over there. Why don\u2019t you go pick it up?\u201d But the economist keeps walking. The non-economist asks, \u201cWhy didn\u2019t you go pick it up?\u201d The economist says, \u201cDon\u2019t be ridiculous. If it was a $20 bill, somebody would have already picked it up.\u201d<\/p>\n

The moral, said Pauly, is that economists often suspect that if something isn\u2019t happening, it shouldn\u2019t; if exchanges were a good idea for individual insurance, wouldn\u2019t there already be automobile insurance exchanges and homeowners\u2019 insurance exchanges and life insurance exchanges? So how much can they add for health insurance?<\/p>\n

But he is keeping an open mind. \u201cI try not to be an economist one day a week,\u201d he said. \u201cThen I say there might be some good new ideas in the exchange concept, but they will have to be invented from scratch.\u201d<\/p>\n

Another focus of the book is \u201cdeductible aversion\u201d \u2014 consumers\u2019 tendency to automatically select insurance plans with the lowest out-of-pocket costs, despite the premium reductions from reducing coverage a little.<\/p>\n

\u201cThe typical homeowner\u2019s policy,\u201d said Pauly, \u201cwill have a US$500 deductible. It turns out that if you bumped up that deductible to $1,000 or $2,000, the amount of premium you could save is generally much more than anything close to the average amount more you would lose in benefits. But people just like low deductibles.\u201d<\/p>\n

Ditto in health insurance, he said. \u201cMany consumers and most policymakers are wary of increasing deductibles. But there\u2019s a camp that believes that a more rational health insurance system would be one with high-deductible health plans of the kind that are, at the moment, winning the marketing battle in the group market. We will have to wait and see what kind of rationality or irrationality wins out.\u201d<\/p>\n

This post was previously posted in Knowledge@Wharton<\/a> today blog: When Insurance Buyers and Sellers Speak Different Languages<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

From the\u00a0Knowledge@Wharton today\u00a0blog. The often oddly illogical behavior of insurance buyers and sellers has long fascinated Wharton health care management professor Mark V. Pauly and his colleague Howard Kunreuther, Wharton professor of operations and information management. During their decades-long collaboration on market studies, the two compiled notes on the ways that insurance companies, consumers and […]<\/p>\n","protected":false},"author":336,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12668],"tags":[],"class_list":["post-7748","post","type-post","status-publish","format-standard","hentry","category-knowledge-today"],"_links":{"self":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/7748","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/users\/336"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/comments?post=7748"}],"version-history":[{"count":2,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/7748\/revisions"}],"predecessor-version":[{"id":7750,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/7748\/revisions\/7750"}],"wp:attachment":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/media?parent=7748"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/categories?post=7748"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/tags?post=7748"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}