How Do Consumers Choose Health Insurance? – An Experiment on Heterogeneity in Attribute Tastes and Risk Preferences

29 Pages Posted: 3 Apr 2015

See all articles by Nadja Kairies-Schwarz

Nadja Kairies-Schwarz

CINCH / University of Duisburg Essen

Johanna Kokot

University of Hamburg; Hamburg Center for Health Economics

Markus Vomhof

University of Duisburg-Essen - CINCH

Jens Wessling

University of Duisburg-Essen - CINCH

Date Written: December 17, 2014

Abstract

Recent health policy reforms try to increase consumer choice. We use a laboratory experiment to analyze consumers’ tastes in typical contract attributes of health insurances and to investigate their relationship with individual risk preferences. First, subjects make consecutive insurance choices varying in the number and types of contracts offered. Then, we elicit individual risk preferences according to Cumulative Prospect Theory. Applying a latent class model to the choice data, reveals five classes of consumers with considerable heterogeneity in tastes for contract attributes. From this, we infer distinct behavioral strategies for each class. The majority of subjects use minimax strategies focusing on contract attributes rather than evaluating probabilities in order to maximize expected payoffs. Moreover, we show that using these strategies helps consumers to choose contracts, which are in line with their individual risk preferences. Our results reveal valuable insights for policy makers of how to achieve efficient consumer choice.

Keywords: Health insurance; risk preferences; heterogeneity; heuristics; laboratory experiment; cumulative prospect theory

JEL Classification: C91, I13, D81

Suggested Citation

Kairies-Schwarz, Nadja and Kokot, Johanna and Vomhof, Markus and Wessling, Jens, How Do Consumers Choose Health Insurance? – An Experiment on Heterogeneity in Attribute Tastes and Risk Preferences (December 17, 2014). Ruhr Economic Paper No. 537, Available at SSRN: https://ssrn.com/abstract=2579733 or http://dx.doi.org/10.2139/ssrn.2579733

Nadja Kairies-Schwarz (Contact Author)

CINCH / University of Duisburg Essen ( email )

Berliner Platz 6-8
Essen, 47048
Germany

Johanna Kokot

University of Hamburg ( email )

Esplanade 36
Hamburg, DE 20354
Germany

Hamburg Center for Health Economics ( email )

Esplanade 36
Hamburg, DE 20354
Germany

Markus Vomhof

University of Duisburg-Essen - CINCH ( email )

Universitätsstraße 2
Essen, 45141
Germany

Jens Wessling

University of Duisburg-Essen - CINCH ( email )

Universitätsstraße 2
Essen, 45141
Germany

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