Why Explaining the Affordable Care Act Turns Out To Be A Lot Harder Than We Thought It Would Be.

One of the chief aims of the Affordable Care Act (ACA) is the expansion of insurance coverage to individuals who at present either cannot afford it or choose not to purchase it. Unfortunately, many Americans lack the financial literacy needed to navigate the numerous and complex options thrust upon them by the ACA.

The ACA contains a number of mechanisms through which coverage will be expanded, including the individual mandate, the state insurance exchanges, and the expansion of Medicaid.

Yet, while many more Americans will be able to obtain health insurance under the law, the new policies present a complex new choice environment for consumers, one that contains new penalties, new subsidies, and a potentially vast number of plans to choose from.  Successfully navigating these choices requires consumers to be financially literate.

As recognized in research on related areas of financial decision-making – such as retirement planning, investing, and debt – consumers often lack the understanding, ability and confidence to make financial choices that are in their best interest.

To shed light on consumers’ ability to navigate the ACA, we recently examined the distribution of financial literacy by household income.  Our findings were recently posted on the Health Affairs Blog and in a working paper by RAND’s Bing Center for Health Economics.

We measured financial literacy in the RAND American Life Panel, a population-representative online panel.

We used general measures of financial literacy since there are currently no validated measures of financial literacy that are specific to health insurance.  These measures focus on numeracy, understanding of compound interest and inflation, as well as risk diversification and investing.  They capture individuals’ comfort with complex financial products, likely including health insurance.

We constructed an index of financial literacy from three questions by counting the number of correct responses for each individual, as is typically done in the financial literacy literature.  We found that financial literacy was particularly low for the population eligible to receive subsidies under the ACA, and most likely to enroll in the exchanges (incomes between 100% and 400% of the federal poverty line, or $23,550 to $94,200 annually for a family of four in 2013).

Consumers with low financial literacy may not fully understand the financial consequences of foregoing insurance and may not reap the full benefits of government subsidies to obtain coverage.  They also may struggle to differentiate among plans even when information about them is clearly presented and may therefore be at increased risk of selecting a plan that does not best fit their interests.  The patterns we observe suggest that these individuals may have difficulties in responding to the opportunities and requirements of the ACA.

Our research suggests that consumers’ ability to navigate this environment may determine whether they are able to benefit fully from the law’s policies.  Furthermore, individuals who face the biggest burden – and perhaps need the ACA’s help the most – are precisely those consumers who lack the financial literacy needed to make this type of complex decision.

Understanding penalties and subsidies is particularly important for individuals with relatively low incomes. These consumers may be eligible to receive premium tax credits and cost-sharing subsidies, and the penalty ($95 or 1% of income in 2014) may loom larger for them in relative terms.

In addition to difficulties in navigating the penalty and subsidy schedules, health plan choice itself may be confusing for consumers. Many have little experience and proficiency with selecting health insurance, a complicated choice involving a multidimensional product that requires understanding deductibles, co-payments, out-of-pocket limits and other complex attributes, as well as making trade-offs between these attributes.

Overall, our research suggests that improving individuals’ financial literacy should be understood as a key element of efforts to expand insurance coverage under the ACA.  Offering consumers such numerous and complex options without ensuring that they are able to make the decisions that most benefit them – and the larger economy – may not lead to outcomes that have the full aggregate benefits that health care reform hopes to achieve.

Sebastian Bauhoff and Katherine Grace Carman are economists at the non-profit, non-partisan RAND Corporation, and Amelie Wuppermann is an assistant professor in the Department of Economics at the University of Munich, Germany.

16 replies »

  1. But the ACA was not written for insured it was written for providers and the insurance industry, because that’s where policy makers re-election funds come from.

  2. Did Americans without the ACA have financial literacy? Did they understand their employers health benefits or the individual policy they purchased? Has the health insurance industry ever made it easy for anyone to understand the implications of their coverage?

  3. Multiple aspects of the statute assume that Americans are sufficiently financially literate so as to: 1) understand this “reform” of 1/6 of the economy; 2) manage their way through the health insurance marketplace and make sound purchasing and spending decisions; and, 3) actually make a reasonable projection as to the relationship between their health and their health care spending and, thus, manage that spending wisely.

    The government will also now treat us to ACA navigators, whose job is to assist decision making as it pertains to purchasing decisions, and hope against hope that health plans, brokers, and providers can help people understand everything else that’s relevant financially, from ludicrous workplace wellness programs (and the incentives tied to them), to what’s the difference between and copayment and a deductible.

  4. I was mistaken. I read over the thread where you argue against wellness programs (those seemingly trying to change bad habits) but extoll good exercise and eating habits.

    I confused the two. Sorry for that.

  5. Nortin,

    Thanks for your support.

    I think that the problem you point is critical, but it’s less part of the insurance equation than it is of the need for people to be able to differentiate amongst their care options.

    Unfortunately, doctors and hospitals don’t want their financial entanglements, outcomes, and adverse events graded and reported, and they have resisted this for decades. It is Lake Woebegone turned on its head: “We take care of the sickest possible patients, so our outcomes are very difficult to judge and report and people will misinterpret the data. Just trust us, we know best.”

    To break this stranglehold will require, among other things, altering the makeup and regulatory authority of state medical boards and perhaps even serious consideration of finally rescinding the favorable tax treatment of hospitals and treating them like regulated utilities, including uniform data reporting that is as understandable as a Consumer Reports article on cars.

  6. Was the ACA supposed to address the financial literacy needs of banks and hedge fund managers?

    Is it your view that every piece of federal legislation needs to address every conceivable ideological grievance, no matter how distant from the legislative intent?

  7. “Not only are most Americans financially illiterate, they’re illiterate about the simple mechanics of making positive day-to-day choices that can support their own health and well-being.”

    But in an earlier thread you argued that made little to no difference.

  8. “Whatever you do, don’t let the Government monkey with my Medicare!”

  9. I also had concerns about financial literacy as a major stumbling block to rational health care under ACA. But then we did the study I discussed in a recent post on THCB (The link at the bottom of this essay is to that post, “The Health Insurance Shell Game”.) A sizable sample of active and retired workers made sense of the options in indemnification. However, their reasoning made more sense in terms of their personal finances than in terms of disease insurance.
    Vik Khanna’s reply above is correct in asserting that the ACA is more of disease insurance policy than a health assurance policy. But does it offer rational disease insurance? The rational basis for choosing a policy relates to the amount you are willing to pay to have access to care that is effective. But so much of “disease insurance” buys access to care that is minimally effective, occasionally effective, or simply ineffective. (My upcoming post on THCB illustrates this using cardiac stents as the object lesson.) Wouldn’t the degree of efficacy alter one’s approach to co-pay, deductible and cap? Shouldn’t it?

  10. Right on, Bubba.

    Reading this essay makes me think not one of the authors has ever met and spoken with a single one of the “average” Americans that the ACA is supposed to so magically and mystically assist.

    Not only are most Americans financially illiterate, they’re illiterate about the simple mechanics of making positive day-to-day choices that can support their own health and well-being. And that is a conundrum for which the ACA offers not an iota of insight or guidance, primarily because the ACA is a vehicle for ensuring that people persist in the wrong-headed obsession with the clinic as the focus of health. The ACA enriches and empowers people who were already rich and powerful. What a shock.

    Health, in the most expansive and visionary use of the word, is not about apps, health plans, ACOs, corporate wellness detritus, EMRs/EHRs, exchanges, or integrated systems. As I will keep saying…health is about a personal state of physical, emotional, spiritual, and intellectual fulfillment that allows you to function in the highest possible state without the assistance of legislative overkill, such as the ACA.

    When was the last time a government initiative gave you any of those elements of personal contentment?

  11. What will be interesting to see is the impact some of these insurance brokers and agents who have been licensed to help consumers through the process.

    They may end up being more helpful than the navigators, who sound as though they will robotically be explaining “how to use the internet for health care.”

  12. The average American is financially illiterate.

    They were expecting what exactly?