Employer‐provided health insurance: Are two options too many?

Existing research shows that having numerous options can be overwhelming. Health economists have also demonstrated that individuals regularly fail to choose health insurance plans that minimize out‐of‐pocket costs or maximize expected utility. These failures are commonly attributed to choice overload, among other explanations. However, less has been written on how well people make choices when faced with only two options, particularly in the health insurance industry. In this article, we seek to add to this discussion by utilizing a proprietary database to analyze how well people choose between only two health insurance plans that are very similar in structure. Our findings indicate that many individuals still fail to choose health insurance plans that minimize out‐of‐pocket costs or maximize expected utility, even with this small and relatively simple choice set. This suggests that more research on nonstandard preferences, low insurance competence, consumer search tools, and smart defaults is needed to better understand the decision‐making process of health‐insurance consumers.