Financial Literacy and Consumer Choice of Health Insurance: Evidence from Low-Income Populations in the United States

Abstract

Under the U.S. Affordable Care Act (ACA), many low income consumers will become eligible for government support to buy health insurance. Whether these consumers are able to take advantage of the support and to make sound decisions about purchasing health insurance will likely depend on their knowledge and skills in navigating complex financial products. This ability is frequently referred to as "financial literacy". This paper examined the level and distribution of consumers' financial literacy across income groups, using 2012 data collected in the RAND American Life Panel, an internet panel representative of the U.S. population. Financial illiteracy was particularly prevalent among individuals with incomes between 100–400% of the Federal Poverty Line, many of whom will be eligible for subsidies. In this group, the young, less educated, females, and those with less income were more likely to have low financial literacy. The findings suggest the need for targeted policies to support vulnerable consumers in making good choices for themselves, possibly above and beyond the support measures already planned for in the ACA.