TY - JOUR AU - Bhargava, Saurabh AU - Loewenstein, George AU - Sydnor, Justin TI - Do Individuals Make Sensible Health Insurance Decisions? Evidence from a Menu with Dominated Options JF - National Bureau of Economic Research Working Paper Series VL - No. 21160 PY - 2015 Y2 - May 2015 DO - 10.3386/w21160 UR - http://www.nber.org/papers/w21160 L1 - http://www.nber.org/papers/w21160.pdf N1 - Author contact info: Saurabh Bhargava Carnegie Mellon University Department of Social and Decision Sciences 5000 Forbes Avenue Pittsburgh, PA 15206 Tel: 5108470005 E-Mail: sbhar@andrew.cmu.edu George Loewenstein Carnegie Mellon University E-Mail: gl20@andrew.cmu.edu Justin R. Sydnor Wisconsin School of Business, ASRMI Department University of Wisconsin at Madison 975 University Avenue, Room 5287 Madison, WI 53726 Tel: 608/263-2138 E-Mail: jsydnor@bus.wisc.edu AB - The recent expansion of health-plan choice has been touted as increasing competition and enabling people to choose plans that fit their needs. This study provides new evidence challenging these proposed benefits of expanded health-insurance choice. We examine health-insurance decisions of employees at a large U.S. firm where a new plan menu included a large share of financially dominated options. This menu offers a unique litmus test for evaluating choice quality since standard risk preferences and beliefs about one’s health cannot rationalize enrollment into the dominated plans. We find that a majority of employees – and in particular, older workers, women, and low earners – chose dominated options, resulting in substantial excess spending. Most employees would have fared better had they instead been enrolled in the single actuarially-best plan. In follow-up hypothetical-choice experiments, we observe similar choices despite far simpler menus. We find these choices reflect a severe deficit in health insurance literacy and naïve considerations of health risk and price, rather than a sensible comparison of plan value. Our results challenge the standard practice of inferring risk attitudes and assessing welfare from insurance choices, and raise doubts whether recent health reforms will deliver their promised benefits. ER -