The variables are endless: discounts, premiums, drug coverage, which doctors are in network, and so on. But will choosing one program over another really make a big difference in one’s health?
Yes, it turns out — and not just a little bit. In a recent study, Amanda Stark, associate professor of strategy at Kellogg, and her colleagues analyzed annual death rates for Medicare Advantage plans, which are privately managed alternatives to traditional government-administered Medicare. The team found “huge” differences between the best and worst designs, says Starc.
The researchers conclude that enrollees’ choice of insurance plan could have a substantial effect on their life expectancy, on average. “It’s not just this abstract financial product,” says Starc. “Counts.”
However, the study found that customers are not getting the information they need to choose the best plans. Although each Medicare Advantage plan is assigned a star rating, these ratings do not accurately reflect the plans’ effects on mortality. Instead, a better proxy is how much a given plan tends to spend on patient care.
And, perhaps not surprisingly, the more expensive plans tend to spend more for patients — meaning that, in the absence of better information, savvy consumers might consider erring on the side of the costlier plan.
How Important Are Insurance Options?
Previous research has suggested that “people are bad at choosing insurance plans,” says Starc.
This matters in the debate over whether to offer a single government plan (like “Medicare for all”) or continue to offer a marketplace with many private plans. Arguments in favor of a market assume that providing consumers with choice leads to better health outcomes. But this approach to the market only makes sense if there are significant quality differences between designs. After all, if a consumer has 30 choices, but all plans have a similar effect on one’s health, then there is little public health benefit to offering so many choices – and the consumer will gain nothing from spending time and effort comparing these options.
To assess how different plans actually affect health outcomes, Starc worked with Jason Abaluk at the Yale School of Management, Mauricio Caceres Bravo at Brown University and Peter Hull at the University of Chicago. The researchers focused on the private Medicare Advantage (MA) plan, which offers consumers many choices. in 2010, a typical county had more than 30 plans available. The team collected data on about 15 million people, age 65 and older, enrolled in more than 75,000 of these plans from 2008 to 2011.
Good Medicare plans, bad Medicare plans
First, the team calculated the annual mortality rate across all plans. Overall, 4.7 percent of people in the MA program died each year.
The researchers then compared death rates across all plans in each county, controlling for demographic factors such as age, gender and race of beneficiaries. Substantial differences emerged: In the average county, a plan that was one standard deviation below the mean death rate had a death rate of 3.8 percent. In other words, enrolling in this plan instead of an average plan was associated with a 19 percent lower risk of death per year.
“Designs are not all the same,” says Starc. “They are very different.”
But the researchers couldn’t immediately conclude that plans with seemingly lower mortality were actually better, since people weren’t randomly assigned to plans. It was possible, for example, that healthier people were more likely to enroll in the lower-mortality plans, so the plans would not get credit for the improved health outcomes.
To reveal the true impact of the plans, the team exploited a quirk in the system. Each year, insurance companies stopped offering certain plans for reasons unrelated to medical care (for example, a policy change that reduced reimbursement by the federal government). People on those terminated plans then had to choose new ones.
The researchers found that these customers’ choices followed a phenomenon called “regression to the mean,” in which extremely high or low data points move toward the average. Customers who had “good” plans—those with low observed mortality rates—tended to choose a more average plan afterward. And those in “bad” plans also tended to gravitate toward more mediocre plans.
Starc and her colleagues then looked at the health effects of people after switching to their new plans. This physical experiment allowed the team to better determine the causal effect of switching to a particular plan on beneficiary mortality, rather than simply observing the mortality rate of all beneficiaries in a plan.
Their analysis revealed that those who moved from good to mediocre plans after their plan ended were more likely to die, while those who moved from bad to mediocre plans were less likely to die. In other words, the observed death rate of a plan does not simply reflect the pre-existing health of the people who chose that plan. The difference in death rates “was really about the design, not the people,” says Starc.
When it comes to insurance, more money buys better health
The team had found that there were real qualitative differences between the designs. But was there a way for the average consumer to distinguish the designs?
For example, researchers had found that plans with lower mortality rates actually had the causal effect of reducing consumers’ risk of death, meaning that the mortality rate could seemingly be used as an accurate signal of a plan’s quality. However, since the plans did not advertise their mortality rates, this was not a useful indicator for the average consumer.
What the federal government did offer were star ratings: each plan was rated one to five stars, based on factors such as customer surveys and the percentage of beneficiaries screened for various diseases.
So should a buyer just go for the five-star plan? After comparing the assessments to the plans’ effects on mortality rates, the team concluded that “the answer is no,” says Starc. “This is a terrible predictor of mortality.”
But other features of the designs were more indicative of quality. Better prescription drug coverage was associated with a greater reduction in mortality, they found. The same was true for plans that spent a higher percentage of premiums on health care, rather than funneling the money toward, say, administrative expenses or profits.
In short: for the average Medicare Advantage consumer, “the plans that spend more are better for your health,” says Starc.
Insurance consumers underestimate the value of a life
Although the star ratings didn’t prove to be very informative, the study found that consumers somehow gravitated toward better plans than they would have expected if they had just chosen at random. Starc suspects they may have relied on other indicators, such as the reputation of the insurance company or the hospitals in the network.
But, curiously, people didn’t seem willing to pay much to reduce their risk of death—perhaps because they didn’t have enough information to ascertain how much an extra dollar would improve their health.
The researchers’ analyzes showed that consumers were willing to pay about $180 to $220 more annually for a plan that offered a one percentage point lower chance of dying that year. While $220 may seem like a lot in terms of premium, common considerations Place the value of a statistical life in millions (based on measures such as how much money people require to perform a dangerous job).
Such estimates suggest that the value of such a one percentage point improvement should be in the tens or hundreds of thousands of dollars. “You make other decisions in your life that indicate you value a one percentage point reduction much more than $250 a year,” says Starc.
How to nudge insurance buyers toward better choices
The findings suggest that Medicare Advantage could improve public health simply by getting rid of low-quality plans. For example, if the government eliminated the worst five percent of plans and randomly shuffled its beneficiaries into other plans, researchers estimate that it would reduce the number of elderly deaths annually by about 10,000.
In practice, however, this intervention could have unwanted ripple effects. For example, if an insurance company carries both low- and high-quality plans and the bad plans are eliminated, the company may no longer be able to cover the cost of its remaining good plans.
But other policy measures could also improve health outcomes. For example, the government could publish the plans’ observed mortality rates, since, as researchers have shown, these numbers accurately reflect the plans’ true effects on mortality. Consumers will then be more likely to make better plan choices, and insurance companies will have incentives to enhance the quality of their plans to keep mortality rates low.
Until then, the best publicly available indicator of a Medicare Advantage plan’s effect on mortality is the portion of premiums spent on patient care — and the price of the plan can be a rough proxy for that.
The takeaway for consumers: “You might not want to go with the cheapest plan,” says Starc.