Healthcare POV: A deep dive into "framing the decision to buy"

Framing the Decision to Buy Long-Term Care Insurance: Losses and Gains in the Context of Statistical and Narrative Evidence

Jeremy Pincus, Katherine Hopewood, Robert Mills

Abstract Rational models have difficulty explaining lowlevels of demand for long-term care insurance. We positthat insurers have framed the need for insurance in amanner that unintentionally promotes risk-seeking behav-ior (i. e., high probability loss frame), and that alternativeframes can better promote willingness to insure. We furtherposit that emotional frames are mor e effective than rationalrisk frames in prom oting willingness to pay. Survey evi-dence supports these hypotheses: emotional narrativeframes are associated with greatest willingness to pay, andthe high probability loss frame was associated with amongthe lowest average amounts willing to pay.

Keywords Emotion, Motivation, Behavioral Economics, Framing, Long term care insurance, Narrative

Introduction

Insurance marketers have struggled for decades to increasesales of long-term care (LTC) insurance, a product desperately needed by many but bought by few. An array of different answers to this question have been proposed (reviewed below), yet a simple but powerful element of themarketing mix has been completely overlooked, namely the framing of the need for LTC insurance. This article seeks to demonstrate the potential power of corrective framing by applying theoretical models and insights drawn from behavioral economics, leading to specific recommendations for marketing managers.

According to standard economic models of rational decision making, consumers should be willing to pay for insurance that covers the single greatest unfunded risk to their retirement income security, namely the financial consequences of needing long-term services and supports(LTSS) (Kaplan2007). Nevertheless, many studies show that very few American consumers actually insure themselves against this risk (Brown and Finkelstein 2007). As the Baby Boom generation marches into retirement, only 6.4% of eligible American adults are currently covered by long-term care (LTC) insurance (Cutler et al. 2010). Because premiums are based on one’s age at issue, prospects for rising coverage levels for the uninsured are likely to diminish as this cohort ages.

The question of why so few Americans have purchased long-term care insurance has been addressed by researchers at public interest think tanks and trade groups (America’sHealth Insurance Plans/LifePlans 2012; Merlis/KaiserFamily Foundation 2003; McGrew/Scripps GerontologyCenter 2000), and other social scientists, producing avariety of partial answers. These partial answers are presented below by category of barriers to purchase.

This question has been studied by several economists who have focused on the availability of substitutes for insurance, especially the potential for crowd out of the private insurance market by the availability of Medicaid (Brown and Finkel-stein 2004, 2007; Sloan and Norton 1997 ), as well as the availability of other substitutes such as unpaid care provided directly by family members (Pauly 1990). Additional factors identified include high transactions costs, imperfect competition, asymmetric information, or dynamic problemswith long-term contracting (Norton 2000).

Lack of consumer readiness to plan for future LTSS has also been cited as barrier to purchase: the failure of the public to meet more immediate, higher priority needs such as adequate savings and health insurance (Merlis/K FF2003, pp. 8–9). Additionally, researchers cite lack of awareness regarding sources of LTSS financing, causing a false sense of security that one’s future LTSS needs are already covered (AHIP/LifePlans 2012, p. 21).

Objections to characteristics of LTC insurance products and their cost have also been cited as barriers to purchase. The top-stated reason for non-purchase of LTC insurance is that it ‘‘costs too much’’ (AHIP/LifePlans 2012, p. 9). Surveys also find concern that premiums will be increased over time and become unaffordable (AHIP/LifePlans 2012, pp. 39–40).

Personality traits and heuristics have been cited as psychological factors that interfere with planning for future LTSS: the true risk of needing LTSS is discounted or denied(AHIP/LifePlans 2012, p. 8); the prevalence of personality traits that prevent planning, e.g., present orientation and external locus of control (AHIP/LifePlans 2012, p. 18); devaluation of future disabled selves (McGrew/ScrippsGerontology Center 2000); and consumer inability to comprehend low-incidence large-loss events (Kunreuther 1978).

Since policy makers cannot easily affect the affordability of insurance, the personality traits of the population,or the availability of substitutes, few remaining viable levers exist for increasing coverage rates. One remaining lever relates to the perceptual framing of LTSS risk, costs,and insurance. Indeed, in summarizing their comprehensive analysis of factors that prevent greater coverage, Brown and Finkelstein (2007) conclude that ‘‘More generally, our findings suggest that an important avenue for further research is exploring empirically the relative impactof various demand side factors on the size of the private long-term care insurance market. These include not only Medicaid but also the role of the family and of limited rationality (italics added; p. 27.)’’

This article was originally published in the Journal of Financial Services Marketing.

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