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NC’s Health Marketplace under the Affordable Care Act: Is too much choice a bad thing?

Guest blogger Zarak Khan is writing a series of pieces for the Pulse about issues surround the new marketplace for health care under Obamacare [1].  After NC’s decision not to set up its own marketplace and reject federal money available for Medicaid, the marketplace or health exchange in NC will be run by the federal government.  People who don’t get health insurance through their work can get tax credits to buy affordable private health plans in the marketplace.  There are pretty important issues as to how this marketplace gets set up however.  The one Khan tackles this week is counterintuitive:  What the adverse effect might be of  having a choice of too many health plans in NC’s marketplace.

From Zarak Khan:

Last month, The Atlantic published “A Million First Dates [2],” which included the story of Jacob, a recently single man in his early thirties who discovers online dating. After years of struggling to find the right woman, Jacob finds himself in an unusual position–he’s simultaneously dating several women he’s attracted to and finds interesting. His newfound options makes it more difficult to settle down. A new world of opportunities is open to him and he takes full advantage of it–with one downside. “Maybe I have the confidence now to go after the person I really want,” he says. “But I’m worried that I’m making it so I can’t fall in love.”

Jacob is not alone in this struggle. In fact, although we are conditioned to believe that freedom of choice means more choices leads to better decisions, most people freeze up in the face of too many options. A study by Sheena Iyengar tested this hypothesis by offering people different types of jam. She found that, though more jam options enticed more shoppers to browse, fewer people actually purchased when more jams were available.

This tasty test illustrates the point that more choice is not necessarily better. In fact, it often leads to what behavioral economists call ‘choice overload’, a barrage of options that leaves the consumer unable to make a good decision.

Iyengar hypothesizes that two factors can further exacerbate choice overload. First, the importance of the decision. That is, if making the ‘wrong’ choice will have a significantly negative impact. And secondly, if substantial time and effort are required to make an informed decision. Clearly, both of these factors are present when choosing health insurance.

While a bad choice of jam might only ruin breakfast, the stakes are much higher for insurance or retirement. Retirement was the subject of another Iyengar study which looked at 800,000 employees and their choice of and satisfaction with a 401(k). The study found that as options increased, participation decreased. Controlling for a range of factors, participation dropped by approximately 1.5 percent to 2 percent for every ten funds added.

This offers a reasonable comparison to insurance because it involves a series of choices, the details of which many people will struggle to comprehend. Each retirement plan contains various permutations of mutual funds, stocks, insurance companies, and other investment opportunities. Plus the decision of how much to regularly contribute to the plan. In short, choice overload will be a real issue for people purchasing through a health insurance exchange–not necessarily due to non-participation (because coverage is mandated) but because people are not likely to understand or consider all their options.