07/07/2011 07:01 pm ET Updated Sep 06, 2011

Clearing Up Health Care Choices

Anyone who's shopped for health insurance knows what a headache the process can be. The disorienting maze of features, benefits, and coverage options can leave consumers under-protected even when they've overpaid.

The federal Department of Health and Human Services (HHS) is trying to create a clearer, better menu for policy holders to order from. Their idea is "Transparency Reporting," a move aimed at streamlining the health insurance purchasing process by asking companies to summarize their policies in easier-to-understand ways.

But to really make a difference, HHS will need to use ultra-clear design and cognitive cues to nudge insurance shoppers away from poor decisions.

Mandated by the Affordable Care Act of 2010, the proposed Transparency Reporting rule would develop uniform disclosure standards for group health plans and health insurance issuers. Essentially, each provider would be required to provide consumers with a document that summarizes benefits and explains coverage in four pages or less. The required information would include the dollar amounts of the benefits as identified by HHS; exceptions, reductions, and limitations on coverage; cost sharing provisions; and renewability and continuation of coverage provisions.

A further requirement is a "coverage facts" label that includes examples to illustrate common benefits scenarios. This label would function like a nutrition label on packaged foods or a fuel efficiency sticker on a car, explaining how much of the costs different plans would cover for sample medical conditions. For example, a label might tell consumers the maximum payments for maternity care, treatment for diabetes, and breast cancer.

Since these requirements would apply across the board, consumers would be much better able to compare policies among different companies.

But to create a truly effective measure, HHS should go beyond these basics and look at consumers' cognitive biases and pre-established patterns of behavior. First of all, the labels must be presented in a clear, easily digestible design. Overly technical language and extraneous information should be left out, especially since it might lead to many readers skipping over important information.

Furthermore, the design of the instruments should provide cues to "nudge" consumers into making better decisions. For example, studies have shown that presenting a potential outcome as a loss can cause people to pay more attention than if presented as a gain. So using simple statistics to create statements such as "the average co-payment for a week-long hospital stay is, on average, 'x' amount of dollars" could help consumers process what's at stake and what they stand to lose should they buy skimpy coverage.

It's known that people tend to underestimate risks to their health, which can lead them to select a more bare-bones policy than would be optimal for them. It's a miscalculation that could end up costing consumers a great deal when something goes wrong and their coverage is inadequate. HHS could require that common medical problems be presented up front, with statistics on their occurrence depending on age and other risk factors. Putting these facts at the fore could encourage more realistic thinking about coverage needs.

Additional benefits of the proposed rule include making it possible for regulators to use the disclosure information to facilitate industry monitoring, and creating a more robust market in which plans and providers could be forced to compete on both price and quality once more informed consumers are able to judge policies on both rubrics.