Choices in Health Insurance Markets: Can Consumers See the Forest for the Trees?

An often heard complaint from consumers in the Dutch market for health care insurance is that they cannot see the forest for the trees, due to the amount of insurance plans on offer and the perceived degree of product differentiation. Using data from 2016, we applied several cluster analysis techniques to identify groups of basic insurance plans that were nearly identical in terms of product characteristics, except for price. The results suggest that for 36 out of the 55 insurance plans, there was a cheaper, nearly identical insurance plan on offer that year, sometimes offered by the same insurance company or even from the same brand. Compared to the lowest priced insurance plan in each cluster, we found that 75% of consumers were on nearly identical, but more expensive, insurance plans. The results suggest that, on average, they paid €100 extra insurance premium that year. This may be partly explained by brand loyalty and unobserved consumer preferences. However, we also found strong indications of spurious differentiation, search and switching costs, complexity and bounded rationality. It is likely that these factors largely explain the observed outcomes. We suggest several (policy) measures to improve consumer choice and competition in this market.