Limited Attention and the Demand for Health Insurance

Abstract

I model how customers with limited attention choose among health plans. The model predicts people to overweight the premium in their decision and thus underappreciate the value of health insurance. This creates incentives for insurance companies to reduce quality and to hide these shortcomings in the fine print while attracting customers with insufficiently lower premiums. I show that this bias survives in a competitive market and analyze how it can be mitigated through unbundling and standardization. The consequences of choice complexity create a fundamental dilemma for policy makers.

Keywords: Limited Attention, Salience, Focus, Health Insurance, Insurance Demand

JEL Classification: D18, D89, I13, I18