Financial literacy is key to understanding health insurance

Apr 29, 2012 by Adam C. Powell, Ph.D.

As an increasing number of Americans are buying their own health insurance, the need for financial literacy has grown. Health insurance plans are complex financial products that many Americans are selecting without the assistance of their employers. Selecting a health insurance plan requires an understanding of concepts related to probability, expected value, fixed costs, and variable costs. It is particularly complex, in that a one-size-fits-all approach cannot be used. People vary significantly in both their preferences and health risks, and as a result, the best plan for one person may not be the best plan for another person, even if the two people are demographically-similar.

To ease life for consumers, the Affordable Care Act requires all health insurance plans to provide a standardized “Summary of Benefits and Coverage” form to consumers purchasing plans beginning on or after September 23rd, 2012. While this will facilitate comparison shopping, consumers will need to have adequate financial and health insurance literacy to be able to interpret the information on the form. A study conducted by Lynn Quincy of Consumers Union, published by The Commonwealth Fund, found that while the new form at first appeared to be transparent, when consumers tried to actually estimate their cost-sharing under different plan designs, they often became frustrated and selected plans which were not in their best interest. From the work conducted Consumers Union, it is clear that for Americans to be able to comfortably select health insurance plans, there is a need for both greater financial literacy and access to decision support tools to guide them through the plan selection process.