Insurance News

The idea behind an annuity is that, in exchange for an upfront investment, it guarantees you an agreed-upon income for the rest of your life. But annuities have never sold as well as most economists think they should and no one seems to know why.

Two Boston College marketing professors say they think they have found the answer: people don't like to think about dying. 

This doesn't appear to make sense on the surface. After all, the whole idea of an annuity is that it keeps you from outliving your money -- no small concern in an era when people are routinely living into their 90s. You may be old, tired, sick, or whatever, but at least you have a few bucks coming in each month. But the process of setting up an annuity forces you to think about how long you have left and therein lies the rub, says Gergana Nenkov, Associate Professor of Marketing with the Carroll School of Management at Boston College.

"When you think about an annuity, you have to think about how long you have left to live, how many years you need to finance," says Nenkov. "You have to think about dying -- that's part of the annuity process, and when people do that, it turns them away."

Hoping it goes away

Previous explanations for Americans' poor record of annuity purchases have focused on low retirement savings, unfair pricing, and decreased flexibility in accessing one's money. 

Nenkov and fellow BC professor Linda Court Salisbury say they applied psychological theory to answer the question that's usually posed in economic terms. 

"Nobody has ever looked at it from the psychology of making the decision and going through with the decision," says Salisbury. "Our idea was the averseness of thinking about your own death is enough to make you use what we call 'mortality salience defense strategy,' which is to avoid it."

In other words, by not thinking about death and not planning for it, we're hoping it will go away. The theory was supported in four studies that included 748 adults. 

One study asked participants whether they would rather roll their retirement savings in an Individual Retirement Account, or purchase an annuity.

"When people considered an IRA, very few thought about dying or how long they have left to live," says Nenkov. "But when the people considered an annuity, a big proportion of them had those kinds of thoughts related to death."

Two of the studies presented participants with annuity descriptions that contained subtle differences. One description indicated the annuity "guaranteed payments for as long as you live," while another "guaranteed payments for as long as you live until you die." Whenever an annuity mentioned death, interest plummeted.

"We showed that even those subtle mentions of death decreased further the rate of choosing an annuity and made people stay away from the product even more than if we just talked about years left to live," says Nenkov.

It's not just annuities, of course.

"Wills, life insurance, estate planning -- all of those decisions are sometimes put off, and we think this issue of not wanting to think about death has a role," says Nenkov. "Maybe finding ways to deal with that anxiety could help consumers overcome it and make the important decisions because if they don't, there are devastating consequences later in life."

Studies show that when consumers are presented with information about what health services cost, they tend to make better decisions. The hard part, however, is finding out what things cost.

New research by Public Agenda, a non-profit research organization, has found that 57% of consumers with health insurance and 51% of those lacking coverage are unaware of what their health care provider charges.

Without this information, the group says, consumers can't compare prices or look for less expensive providers when they are quoted a price they can't afford.

The study found that 56% of U.S. consumers have actively looked for prices before getting care, and 21% say they have compared prices across several providers. Of that group, nearly all say the price comparison influenced their decisions and ended up saving them money.

Consumers who compare prices charged by different providers tend to get more regular medical treatment. The study shows 42% of people who have compared prices before getting care receive regular medical treatment, compared with 33% of those who have not ever sought price information before getting care.

Make it easier to discuss prices

The authors say their findings suggest consumers want price information about their health care. They urge the industry to make it easier for providers, staff and insurance company personnel to discuss prices.

“The finding that many Americans are already trying to get price information from receptionists and hospital staff, insurance companies, doctors, hospital billing departments and nurses suggests a need to strengthen these professionals’ capacity to provide and discuss price information,” the authors write.

Consumers also need assistance in knowing where to look for price information. Part of the problem is health insurance. Some providers charge different rates, depending on whether the patient has a healthcare policy, and if so, what kind. However, a federal report recently found this does not happen as much as it once did.

Here's an example of a health care provider that posts its fee schedule, for both insured and uninsured patients.

More out-of-pocket costs

Since the Affordable Care Act (ACA) went into effect, health care consumers have been getting familiar with high deductible health insurance policies, according to the latest Survey of Consumer Finances (SCF).

A high deductible means the consumer pays the first $5000 or so of medical costs each year before certain aspects of the coverage kick in. It's designed to give consumers incentive to seek out lower health care prices.

But again, if consumers don't know what the care costs, and don't know where to look for the information, they aren't in a position to save money.

While ACA has made coverage more affordable, the high deductibles often mean many consumers can't afford to use their coverage.

“We assume that households pay premiums out of current income, but that they may need to use savings or other assets if they become seriously ill in order to meet the deductible or the out-of-pocket limit under their health insurance policies,” the SCF authors write. “We show that many households, in particular those with lower incomes or where someone lacks insurance, have low levels of resources that would make it difficult for them to meet health insurance cost sharing demands.”

All the more reason, it would seem, that health care consumers need an easy, transparent way to find out what things cost.

California's health exchange has been one of the biggest and most successful state Obamacare programs. But today, Covered California, as it's known, announced an average statewide premium increase of 13.2 percent for 2017, setting off a round of criticism and defensive responses.

“These outrageous premium hikes are the consequence of California’s failure to adopt health insurance premium regulation like the majority of the states and the disappearance of federal subsidies for insurance companies to even out bumps in the road ,” said Jamie Court, president of Consumer Watchdog, which sponsored an unusccessful rate regulation initiative in 2014.

Insurance companies said the rate hikes -- more than three times the increases of the last two years -- were the result of factors beyond their control. 

“In 2017, Covered California prices are influenced by higher spending on medical care, particularly skyrocketing prices on specialty drugs, and the sunset of two federal programs," said California Association of Health Plans President & CEO Charles Bacchi.

“California’s health exchange opened up access to health care for millions, with 11 health plans in Covered California competing over price and quality and in most of the regions of the state," Bacchi said.

“Some rate increases are necessary to cover the cost of care as more and more Californians use medical services that have become increasingly expensive each year. As prices for hospitals, doctors, specialty drugs and other services keep climbing, we cannot lose focus on our goal of affordability,” he said.

"Regulation is the hammer"

But Consumer Watchdog, a nonprofit based in Santa Monica, said the increases could have been avoided if the rate regulation initiative had passed.

“When three health insurance companies control 90% of the market there is no bargaining with them absent a hammer. Rate regulation is the hammer," Court said. "California consumers cannot continue to pay more for very limited doctors and hospital networks. Rate regulation needs to move to the top of the legislature’s list.”

The ballot initiative failed to pass in a record-low turnout election, but it garnered 41% of the vote despite a $57 million insurance company campaign against it, Court noted.

The federal programs that are being phased out were intended to help stabilize the market during the first few years of the Affordable Care Act (ACA).

How much more individual consumers will have to pay depends on whether they are eligible for taxpayer-supported subsidies and whether they choose to switch to lower-cost plans that may have higher deductibles and co-pays.