Coleman Drake, Conor Ryan and Bryan Dowd have a new paper in the Journal of Public Economics that attempts to figure out why 81% of people who re-enroll in their ACA plans stay in the same plan for the next year. They posit three types of plausible forms of inertia**:
- Preference for the same provider network
- Inattention to availability of options
- Hassle costs of switching between plans
We find that eliminating inattention and hassle costs would reduce repeated health plan choice by 53 percentage points and that interventions to reduce inattention and hassle costs are complements. Inattention and hassle costs cost consumers over a billion dollars in foregone consumer surplus in 2018, roughly $1,790 per household per year or half the annual premium paid by the median household, with inattention accounting for the largest source of forgone surplus.
Why does this matter?
The ACA individual health insurance markets are messy choice environments. The California markets that this team (and others, myself included) are comparatively cleaner choice environments as benefit designs are standardized and game playing is limited but relative premiums change every year, both net of subsidy and gross, insurers enter and exit and life happens so risk preferences change. We would expect in a perfectly frictionless market that a lot of people are reasonably happy with their insurance in year 1 but would want to switch to something else in year 2. We really don’t see that a lot. This lack of movement means insurers compete hard to get people to sign up in the first year and then can go on cruise control with the objective of not overly pissing off people who are profitable to leave in the out years. That is not a particularly well functioning market.
The researchers found that taste for network continuity is barely relevant in their modeling. The two big factors that drive inertia are inattention and hassle costs. Inattention happens when people just don’t go and look. We know that automatic re-enrollment is really good at getting people to stay covered but at the same time automatic re-enrollment places people into objectively inferior dominated plans. Nudges and technocratic solutions such as re-working the automatic re-enrollment matching algorithms could significantly reduce the inattention costs. But the big problem (in my opinion) is that very few people actively like to look at their health insurance (I’m excluding myself from this statement). Inattention is a huge challenge.
The second challenge is the costs of switching insurance are high. Some of these costs of compliance costs which means setting up a new payment mechanism, and potentially re-running previously approved prior authorizations for medications and treatments. Some of these costs are information. How does Insurer X pay for Drug Z? Can I just make an appointment or do I need to get a referral? Some of these costs are psychological — does my new insurance work the way I think it should/does? For someone who has medical needs, knowing that their current system mostly, sort of kind of, works reduces risk compared to transitioning to a new system that promises to be better after a significant mental investment with uncertain and future outcomes.
The researchers argue that eliminating inattention and hassle costs would lead to three times as much switching behavior. This would dramatically change the structure of the marketplaces as insurers would no longer be competing mostly on attracting first year buyers who are likely buying mostly on price, but they would need to be competing on retention as well. I also think that this counterfactual universe would significantly stress current risk adjustment systems as there would be less aggressive coding and ineffectient choice may act as an anti-selection mechanism.
** DISCLOSURE: I write with Coleman all the time.