The Land of Milk, Honey and Low-Priced Health Insurance

Not long ago we received our first signs that all may not be well in the land of milk, honey, and low priced insurance, i.e. the ACA insurance exchanges.  Many insurers, including some of the largest in each state, have requested double digit rate increases, with some asking for raises that exceed 30 percent. A casual review of these requests suggests that the increases are largest in areas where the premiums were initially lowest. If these increases are approved, it will mean dramatically higher payments for enrollees, and escalating tax bills for the rest of us.  This is particularly true when the premium hikes affect the lowest priced “silver” plans available in the market (as the subsidies are tied to premiums for the second cheapest silver plan). Of course, the premium increases might backfire on insurers, but only if enrollees opt to switch to cheaper plans.

However, we have grave doubts about whether this will be the case. If participants in the exchanges behave like enrollees in employer-sponsored plans, then it seems unlikely that there will be much switching out of plan. This is a natural consequence of the way the exchanges work, combined with well documented inertia on the part of health insurance enrollees.

What is this inertia?  Academic research performed here at Northwestern University and elsewhere convincingly shows that employees are reluctant to switch health plans, even if they stand to save $2000 or more without sacrificing quality or access.  In addition, a pair of studies of Medicare Part D prescription drug plans also demonstrate that consumers switch plans infrequently and those that switch do those mostly in response to changes in the design of their own plan (i.e., are their preferred drugs on formulary) rather than in response to the relative financial attractiveness of theirs versus competing plans.

The broad reason behind this behavior is something that we can all relate to – most of us would rather avoid the unpleasant task of comparing health plans.  The architects of the ACA exchanges understood how difficult it is to shop around for insurance and wrote some rules to simplify the task. All plans have the same minimum benefits, and plans are shown in “medal” tiers (bronze, silver, etc.). But we question whether this is enough to get individuals to reconsider their health plan choices. Consider that the plans in the Northwestern study were practically identical except for premiums, deductibles and cost sharing provisions whereas the exchanges plans are far more heterogeneous.

Exchange rules can catalyze this inertia (now there is an oxymoron!).  Most exchanges automatically reenroll participants in the same plan they had in the previous year.  We suspect that the first time that many enrollees will find out about their premium spikes will be when they get their first bill.  Consider that recent survey evidence shows that 70 percent of enrollees in ACA compliant plans didn’t shop around before renewing their coverage.  And by the time they truly digest their new expenses, it may be too late to switch. (Of course, the poorest enrollees in the cheapest plans may have no premium sharing regardless, but that is another story for another blog).

We are tempted to hector the American consumer into becoming better shoppers by reminding them that they spend more on health care than they do on cars, yet they spend infinitely more time shopping for the latter than the former.  But we are reminded that driving a car can be fun, while engaging with health insurers is, shall we say, less fun (and that’s coming from two health economists, imagine how real people feel!).   So rather than browbeat consumers into paying attention to prices, we think it better to find other ways to “nudge” them to shop around.  We also note that if this was solely about what consumers pay for health insurance we might be less concerned, in a free society people will make mistakes.  However, a large fraction of these costs are borne by taxpayers and thus we care quite a bit more about the outcome of these mistakes.

When it comes to first time buyers, the exchanges do a great job. In this case, “inertia” means going without insurance and paying a penalty. First time buyers have to shop around and the websites are designed to facilitate comparison shopping. The standardized plans and medal tiers, combined with links to network providers, make the process for first time buyers relatively pain free. Though we do note that this requires these websites to have up-to-date and accurate information about these networks (again, a topic for another day). But reenrollment is another story. No one wants to shop for health insurance a second time, so most of us are happy to reenroll in the same plan.  Even if this is not a conscious choice and however irrational it may seem, the trials and tribulations of everyday life seem to make it hard to take the time to concentrate on the long term planning of health insurance compared to the short term difficulties of work, kids, and other tasks.  The rule makers have indulged our lassitude by making this reenrollment automatic and painless, or at least painless until the bills come in the first month.

Our recommendation is simple and not unique to this setting – do not automatically reenroll individuals in the same plan. We are not suggesting that everyone has to sign up anew each year – too many who are currently enrolled will fail to do so and the number of uninsured would increase.  While we are both big believers in personal responsibility, such a proposal would be throwing the baby out with the ACA bathwater. Instead, we are suggesting that at renewal time, all individuals are asked to affirm whether they want to keep their plan, switch plans, or drop coverage.  Those who do not respond are automatically reenrolled, but are not necessarily assigned to their own plan.  There are a number of options for reassignment that would avoid financial surprises – for example enrollees could be reassigned to any plan that cost no more than the second cheapest silver plan.  In addition, they could be allocated at random to a plan that matches the distribution of people that actively re-enrolled.  There are many positive and negatives to each decision rule and we will allow rule makers to figure out the details. We should note that we are not attempting to force people into cheap plans just to minimize their expenditures. After enrollees are reassigned, they can be given additional time to accept the new plan or pick another (possibly their old plan).  What we want to avoid is that a lack of attention is costing everyone money because insurers may be gaming the design of the exchanges and consumer inertia.

Our proposal has several benefits.  First, it allows enrollees the option to affirmatively ask to reenroll.   Those who initially fail to act will be given a chance to reconsider.  Many will perk up and do some comparison shopping and those who do not will be switched into relatively cheaper plans.  We would expect that the combination of these factors will encourage insurers to redouble their efforts to hold down premiums while maintaining other elements of plan design that will attract enrollees.

Health insurance markets have never functioned perfectly and there is plenty of blame to go around for their failure.  Exchanges offer a partial solution to the problem by increasing the ability of customers to comparison shop.  While the rule makers have taken due care to assure successful competition for first time enrollees, enrollee inertia threatens to undermine the ongoing success of exchanges.  Let’s put an end to automatic reenrollment, and help assure continued vigorous competition within the exchanges.

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5 replies »

  1. I certainly would agree that there needs to be healthy competition in the health exchanges (excuse the pun) as there needs to be competition in any area where suppliers set prices based on demand. It is a good idea to highlight rate increases like these so that people understand that they may not always be enjoying such a good deal, and that they have to shop around for the best plan for their needs at the time.

  2. While there was a lot of publicity about exchange plans seeking percentage premium increases for 2016 well into double digits in some cases, I haven’t seen any data as to how many members are actually enrolled in these plans as compared to the plans that will raise premiums by a single digit number, hold rates flat or even lower them next year.

    As for the risk ACA 3 R’s, my understanding is that reinsurance and risk corridors disappear after 2016 but risk adjustment is permanent. I note that Medicare Advantage premiums are adjusted for individual risk scores and the mechanism seems to work pretty well in that market. I don’t see why the exchange market should function differently.

    With respect to the self-funded employer provided health insurance market, employers assume the risk to pay all legitimate claims no matter how high unless they purchase reinsurance which is quite expensive unless the attachment point is very high. If overall claims costs are deemed too high, benefits could be adjusted and / or the employee contribution toward the cost of the premium could be increased in the following year.

  3. Nations like Germany and Switzerland also use private insurers, and also have mandates, but use a much different model. They discourage or even ban consumers from jumping around to different insurers each year. Instead, they use risk adjustment transfers to keep insurance companies stable.
    The ACA model is to let an insurer get hit with high claims, and (after 2016) do absolutely nothing. The suffering subscribers of that insurer are supposed to flee to a carrier that has had lower claims or is just entering the market.
    Americans have in this case a stupid fetish for competition.

  4. Group and individual insurers have very low persistency
    They turn over most of their business every 3-5 years
    It is a very expensive business model when you have little client loyalty and for good reason
    Insurers do not want long term clients for medical claims rise as people age
    Don Levit

  5. So, tangentially, if SCOTUS strikes down the federal HIX subsidies via the specious King v Burwell, the impact on the Land of Milk and Honey will be even worse, ‘eh? We should know shortly.