A valued reader e-mailed me his situation and I think it highlights a signiifcant problem with choice in the insurance markets:
I’m responsible for figuring out my partner’s Medicare, and we just got the “annual notice of changes” from Big National Carrier for the “BNC Rx Secure(PDP)” plan. The monthly rate is going from $35.80 to $60.50, the annual deductible is going from $0 to $250, the Tier 1 “standard cost-sharing” is going from $4 to $15 (the “preferred” remains $1), the Tier 3 goes from 22% to 25%, and so on. Obviously, we’ll be switching… again. Last year, it was Another National Carrier that tripled its rates, which is why we have BNC now.
It’s annoying, but the Medicare plan-picker is easy to use and we’ll find something else. But I’m a young(ish) tech-savvy guy on top of things. Most Medicare recipients are older and may not be as aware of the impending doom. I shudder to think of the old folks in the retirement home down the street with piles of unread mail.
Do you think that BNC and their ilk do this on purpose, drawing people in with good rates when they’re cogent, and counting on them being unable to react when they shoot up?
I think there are a couple of things going on here. The first is the prescription drug space is getting really wierd actuarially speaking. Hep-C and cholesterol have both seen very expensive specialty drugs introduced in the past eighteen months. There are a couple of other drugs that can routinely run $15,000 or more per course of treatment per member per year where the target population is fairly large. The actuaries are having a very hard time figuring out who will be on the high cost specialty drugs (especially as there is a push for Hep-C treatments to be made available for people with F-2 damage to their livers instead of F-3/F-4 damage). That is one of the reasons why pricing on prescription drug plans is a bit funky this year as the actuaries are trying to guess what the strategic interaction effects of different pricing strategies will be.
More basically, the last sentence hsa some truth to it, but I don’t think it is particurly malicious. Most people make satisficing choices where they choose something that is good enough. We don’t optimize our health insurance choices. People consistently choose profoundly sub-optimal health insurance plans. Usually good enough is good enough as there is a cost of switching. It takes time to figure out if another carrier will cover the three prescriptions that you know you need, it takes time to rebuild a relationship with a pharmacist if you have to switch pick-up locations, it takes energy to grok the difference between which pills are 30 day pick-ups and which pills are now 90 day mail prescriptions. It takes time and energy to switch from a good enough plan to an optimal plan. There aren’t too many good decision support tools that can help people make better choices at fairly low cognitive costs.
This means that people are fairly sticky. Once they choose a decent plan, they tend to stick. Every insurer knows this, and they definately try to frontload the benefits of their products to build a large initial membership base as that large initial base will stick with what they know even as the product degrades in its comparative attractiveness. I don’t think BNC is specifically targetting old people for exploitation, it is just a fact of life.
As a side note, one of the interesting things in the Exchange has been that people aren’t acting particurly sticky. It may be that the Exchange population has a large number of healthy and very cost sensisitive individuals on it who have not invested time to build relationships with their providers and their systems and are willing to save $15 per month in switching from ANC to BNC to Big Blue.