I want to talk about some research that my co-author, Petra Rasmussen, and I are presenting at Academy Health’s Annual Research Meeting this week.
We wanted to look at how people made choices when there was a clearly dominated plan on their choice menu.
The short version is not too well.
The long version is not too well. Choice architecture, defaults and inertia matters a lot.
A dominated choice happens when there are two choices, A and B who share basic relevant attributes. On all of the relevant attributes A either ties or beats B. In that case A is the dominant choice and B should never be chosen if we’re working from a rational choice framework. Dominated choices are fairly rare in insurance because there are seldom opportunities for all attributes to be equal. Dominated choices are unlikely to occur in the ACA markets because Silver plans are usually a distinctly different item than Gold plans.
However, silver-loading and California’s actively managed marketplace produced the possibility of strictly dominated plans being offered in 2018. We looked into this.
California has a rule that an insurer can only offer a single plan in each metal level/network/plan type. Furthermore, California only allows insurers to offer standardized benefits. All silver plans have the same deductible, co-pays and co-insurance and maximum out of pocket limits. All gold plans share the same cost-sharing structures. The only variation at a particular metal level that consumers, in a given rating area, see will be premium, insurer name, plan type (HMO, EPO or PPO) and network. From 2014-2017, this does not produce dominated plans. There is a fairly orderly trade-off within insurer/plan type/network verticals. A Bronze plan has lower premiums but more cost sharing than a standard silver which has lower premiums and more cost sharing than a gold offered by the same insurer. Controlling for insurer/plan type and network, we see a clear premium-cost sharing trade-off. People with a mix of preferences and expected future healthcare costs can rationally calculate that Gold is the best plan or Bronze is the best plan for their personal scenarios. Nerds will lay out the odds of each of these choices being retrospectively right, but there is fuzziness in what the optimal choice is.
In 2018, this changes. California, in response to the threat and the eventual termination of direct federal reimbursement to insurers for Cost Sharing Reduction (CSR) subsidies, engaged in a practice known as Silver-switching. Silver-switching is the practice of placing all of the costs of CSR subsidies onto only on-Exchange silver plans. Pragmatically, this means Silver premiums spiked relative to Gold premiums. Petra found significant plan switching in a previous paper while I, with another batch of co-authors, found massively increased affordability for the cheapest subsidized plans. ** Relative price spreads shrank massively for all plans. For some insurer/county combinations in California in 2018, the premium spreads inverted so gold was cheaper than some insurers’ silver plans in some counties.
This was our opportunity. We looked at people, earning over 200% FPL to wash out CSR messiness, in these counties who bought either a particular insurers’ dominant gold plan or dominated silver plan. A pure rational choice model would predict that no one in this universe bought silver and everyone bought gold from the same insurer/plan type/network.
Is that what happened?
HELL NO!
Lots of people bought silver plans for 2018 that cost them more in monthly premiums than the gold plan that they had available and if there was any medical utilization during the course of the year, their cost sharing in silver was never lower and often higher on both a per service and cumulative basis than the gold plan. We calculated that this population on average spent several hundred dollars more per family in annual premiums for a bad choice and could not calculate the cost-sharing loss but can assume it is, on average, significant.
Choosing insurance is tough.
** Side note, this paper originated from a long discussion after a presentation session where soon to be Dr. Rasmussen presented her plan switching work at ARM-2019. We had similar interests in ACA choice behaviors so we stayed in touch and kept on chatting back and forth on ideas that could be interesting to poke at. And now we have a paper that is working its way through the review process.
I have a hard time seeing how these types of quasi-random interactions happen during virtual conferences. I wonder if there are economists already prepping discontinuity shocks by discipline on new co-author ties depending on if a major conference was before or after the shut-downs.
Ken
Alternate conclusion: Humans are not in fact the rational decision-makers that are so beloved – one might even say required – of economic theorists.
Edmund Dantes
Also most humans don’t have the skills or time to effectively identify what their typical year in year out medical costs will be with appropriate spaced medical oddity scenarios to best price optimize their insurance choice based on said likelihood and thus look to see if their favorite doctor is covered, or network of doctors is near their home/work, network has hours that fit their life, or the cheapest upfront cost, etc.
PenAndKey
@Edmund Dantes: And, in a saner society, they wouldn’t have to.
David Anderson
@Edmund Dantes: The nice part of our research design is that we are holding network constant, we are holding customer service experience constant, we are holding prescription drug constant in our decision analysis.
I agree that comparisons between insurers and between networks is a task that is cognitively expensive and messy as hell. We’re able to take advantage of California’s market organization to waive away a lot of the messiness and get a clean comparison of a limited number of dominated attributes.
Mudbrush
I appreciate your dedication, years of education, and brilliance, David, but you study insane shit.
Edmund Dantes
@David Anderson:
@David Anderson: oh I know you did for your study, but people aren’t good at this and have never been. And rarely ever get this clean of a choice (and it probably still wasn’t clean in the sense that a lot of people probably don’t even know or understand what choices and trade offs they are making by making a choice as simple as “I will only look at silver plans”)
There is a reason why the car salesman’s 4 square technique has worked so well for so long. The same dynamic is in play. Most people have no idea what trade offs they are making by focusing on monthly payment vs trade in value vs total cost of car, etc.
The study is good and necessary so please don’t take this as criticism of the study.
dnfree
There are so many areas where people have no idea of how to evaluate, or what the poorly-publicized rules are. This is another.
We have a relative with an insane amount of student debt weighing him and his family down. We tracked our child’s debt closely, paid the interest when she was in school to keep the debt total from growing, and followed the arcane rules to consolidate at a lower interest rate and longer term that only apply for a few months after leaving school. Young relative’s family had no idea how to do any of that or that it was even something possible. On top of that he got bad advice at some point to just stop paying.
It seems the people least able to negotiate complex financial situations are the most likely to be left to their own devices, at great financial cost.
David Anderson
@Mudbrush: YEP!