By Rebecca Diamond, Michael J. Dickstein, Timothy McQuade, and Petra Persson
National Bureau of Economic Research, May 2018
The Affordable Care Act (ACA) established health insurance marketplaces where consumers can buy individual coverage. Leveraging novel credit card and bank account micro-data, we identify new enrollees in the California marketplace and measure their health spending and premium payments. Following enrollment, we observe dramatic spikes in individuals’ health care consumption. We also document widespread attrition, with more than half of all new enrollees dropping coverage before the end of the plan year. Enrollees who drop out re-time health spending to the months of insurance coverage. This drop-out behavior generates a new type of adverse selection: insurers face high costs relative to the premiums collected when they enroll strategic consumers. We show that the pattern of attrition undermines market stability and can drive insurers to exit, even absent differences in enrollees’ underlying health risks. Further, using data on plan price increases, we show that insurers largely shift the costs of attrition to non-drop-out enrollees, whose inertia generates low price sensitivity. Our results suggest that campaigns to improve use of social insurance may be more efficient when they jointly target take-up and attrition.
By Don McCanne, M.D.
There is a lot to not like about private insurance companies: high premiums, excessive deductibles and coinsurance, narrow provider networks, prior authorization requirements, tiering of benefits, and the like. But the insurers are businesses, and these features are designed to ensure that they are a business success.
What about their enrollees? This research paper shows that many insured individuals will maintain their coverage for a limited amount of time, moving their annual heath care consumption into the months that they are covered, and then drop out. They are concentrating as much of their full year’s care into those few months as they can, and then avoiding the full year of premiums by dropping out. This means that they do not pay their full share of health care whereas those that remain covered the full year pay higher premiums to cover the unpaid premiums of those who dropped out – a variation of adverse selection.
Are those who dropped out to be blamed for gaming the system? For that matter, are the insurers to be blamed for crafting a business model that ensures their success even at the cost of their beneficiaries? In both instances they are doing their best to make our current system work for themselves. It is neither the insurers nor their beneficiaries who are in the wrong; it is the design of our health care financing system that is at fault.
Contrast that to a public financing system that is designed to ensure that patients get the care they need. It is not designed as a business model but rather as a public service model. Likewise, patients would not be conspiring to game the system, but rather they simply would access the health care that they need when they need it.
It is so obvious that we need to replace our current, fragmented, dysfunctional financing system with a single payer improved Medicare for all that the perplexing question is why haven’t we done it before now?
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