A $10 increase in a health plan premium drove up to 3% of retired University of Michigan employees to leave the plan, according to a study from U-M published in Health Economics, The Price Sensitivity of Medicare Beneficiaries.

The U-M researchers analyzed the behaviors of 3,182 retirees over four years, to assess the impact of price on beneficiaries’ health plan choices. During the four years, the premium contribution for retirees increased significantly.

The researchers conducted this study, in part, to anticipate how Americans will respond to health insurance exchanges in 2014 as they bring health plan information to the market from which people can make buying decisions for insurance.

Health Populi’s Hot Points:
I read this study from a vacation perch in Da Nang, Vietnam, where I’m thinking about the “diamond-water paradox” I learned about in Econ 101 a couple of decades ago at the U-M.

Also known as the paradox of value, the diamond-water paradox is an important construct to consider especially useful in the microeconomics of health and health care. While diamonds command a greater price in the market, water is far more useful and, under most circumstances, far more valuable.

So it was last night when consuming a spicy dinner after a long humid day in the sun, we paid $6 for each of two bottles of water. The aha! moment here was that when home, I spend the grand price of $.79 on a bottle of Poland Spring water from Wegmans, but in a resort in a fast-developing country, $6 is most welcome to quench my dehydrated body.

In the 1980s when first studying health economics at U-M, our example was insulin for a diabetic: clearly, people would surely pay a price for a medication to save their life versus spending that money on another good.

Buying health insurance is morphing into purchasing a consumer good as more transparency and comparative information comes into the market through services like Castlight Health, change:healthcare, and Simplee.

Where does health insurance fit into the diamond-water paradox? It’s contextual and personal preference-driven, based on our perceived risks and values.

There are in reality patients who disband taking life-saving drugs due to co-pays, and people who opt out of paying premiums for health insurance which eat into household budgets and spending on food, shelter and ever-increasing petrol prices. What we learned in graduate school in the 1980s has not tested entirely true against the reality of Americans facing growing copays and coinsurance payments for health goods and services in the 2010s.

This is the crucial role that health plan benefit design can play in nudging people to do the ‘right thing’ when it comes to health behavior, whether for persuading people to purchase health insurance (a rationale for the individual mandate), to use health services, or to continue to stay on maintenance medications. On the road to health insurance exchanges, teaching people how to be rational health consumers is a must-do. Otherwise, people could self-ration their use of health care in ways that could be detrimental to their health.

Rationing, like the way my husband quite slowly poured the $6 bottles of water, ounce by ounce, last night at dinner…

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