Health Insurance Exchanges and Switching Coverage

Economists increasingly try to study the real-life behavior of consumers.  The lessons learned are applicable to health care as they are to other industries.  A new paper from the National Bureau of Economic Research examines the interaction between consumer inertia and plan pricing behavior for the Medicare Part D benefit, which is run as a competition among private plans.  The authors sought to ascertain the extent to which beneficiaries might stay with the plan they originally enrolled in at annual re-enrollment times, even though it may no longer be the best value for them and how plans seem to change their prices in response to any consumer irrationality that might occur.  The author finds that there is a pool of enrollees who do not switch plans after the first or subsequent year, even though they could purchase a cheaper plan.  In addition, Part D plan sponsors appear to use what the author refers to as an “invest and harvest” approach under which they offer low prices in the first year or so of a plan, then raise the plan in succeeding years, knowing that many enrollees will not switch, notwithstanding the price increase.   (NBER Paper)

The presumption is that, particularly because the Part D subsidies from CMS are risk-adjusted, the higher prices lead to higher profits.  The author, however, did not access actual claims data from Part D plans, so it remains possible that at least some of the plan pricing behavior can be attributed to higher than expected, or just growing, claims costs.  Whatever the explanation, the behavior of the plan sponsors seems clear–they raise prices on existing plans, while introducing new ones with lower prices to attract new enrollees.  While CMS attempts to limit gaming of plan design and introduction by sponsors, it may need to have stronger rules to make sponsors stick with the original design and plans they offer.  Currently, if a beneficiary does not proactively switch plans at the annual open enrollment, he or she stays in their current plan.  Another simple way to avoid the plan sponsor behavior is to require beneficiaries to reenroll every year.  This would focus their attention each year on price and other factors in their choice and there are tools available to help them optimize their choice.  The author notes that there are lessons from the Part D experience which can be applied to the looming introduction of health insurance exchanges in every state.