Elasticity is simply how much does a change in price lead to a change in the amount of something bought. Items that are very inelastic in the short run can see large changes in price with small changes in demand. Gasoline is a good example. Items that are very elastic will see the quantity purchased fall off dramatically with a minor price increase.
There are two types of elasticity in the ACA markets that interest me. The first is the buy or no buy decision. What does a small change in price mean on the decision to buy or not buy insurance ? The second is what plan does one choose when the decision to buy a plan is made?
I am interested in these as the upcoming policy year is going to be a mess with an incredible amount of discontinuous data in the ACA markets because of a variety of pricing decisions insurers and state regulators are making right now. The most common decision that insurers will need to face is how to do they price Cost Sharing Reduction (CSR) subsidies. They can choose to assume that CSR will show up, they can choose to assume it will not be consistently paid. If they assume that it won’t be paid, insurers can load the CSR obligations into all premiums, into Silver only premiums or into on-Exchange Silver premiums only. In single insurer regions and states, we will see incredible opportunities for Silver gapping.
Evan Saltzman at Penn has an interesting review of consumer behavior regarding differential pricing in California and Washington. I think this work will be extraordinarily relevant in 2018:
(1) high own-premium elasticities of −6.9 to −7.8, but low insurance coverage elasticities of −0.5 to −0.6;
(2) minimal response to the mandate penalty amount, but significant response to the penalty’s existence, suggesting consumers have a “taste for compliance”;
What he is saying is that people who are in the market will readily switch if there is a better deal. The market is not particularly sticky for the people. This confirms other reports and research. He is also saying that the decision to get into the individual market is a highly resistant decision. Post-subsidy premiums that are significantly lower in 2018 compared to 2017 will be needed to move people into the market.
And we might get that. In states that are adapting Silver only loading plans to deal with CSR uncertainty, Bronze and Gold plans will be dramatically less expensive in 2018 than they were in 2019 for people who earn under 400% FPL. Zero dollar Bronze plans will be common for individuals making over 300% FPL as Silver Benchmarks will now be priced thirty actuarial value points above Bronze instead of six to eight actuarial value points above Bronze.