High Insurance Costs Linked to Abundance of Complex Choices

If the insurance market worked like it's supposed to in the textbooks, insurers would have to sell the same products at roughly the same prices as one another. Votruba contends that there is a lot of unexplained variation in premiums for plans that look to be similar, and that even if you control for everything about the plan and group being covered, you can't predict the premium.

In economist jargon, the shopping problem is called search friction, meaning there is a general impediment to consumers' ability to evaluate all the options in the market. Generally, and smaller hospitals and physician practices should recognize this in negotiations to cover their own employees, they see a random sample of the insurance offers available in the market.

But they don't know whether they got the best possible plan because they didn't see all the options and that leads to more turnover. In a future year, they might find a better option that gets them to leave their current plan.

"The really important thing is that when the sellers (insurers) know that employers can't see everything, they don't have to compete as hard on quality and price," Votruba says. "Instead of everyone charging the same premium for the same type of plan, insurers will choose a variety of different strategies. Some might choose high-volume, low-premium offer.

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