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.
This commentary originally appeared on The Health Care Blog on October 2, 2013. Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.