Panel Paper: Switching Costs and Inertia in the Individual Health Insurance Market: The Experience of Covered California 2014-2018

Thursday, November 8, 2018
Wilson B - Mezz Level (Marriott Wardman Park)

*Names in bold indicate Presenter

Coleman Drake, University of Pittsburgh and Bryan Dowd, University of Minnesota

Being enrolled in a given health plan in the previous year increases the probability that an enrollee will enroll in the given health plan in the current year. This phenomenon, known as inertia, can result in enrollees making costly dominated health plan choices and decreased insurer competition on premiums and plan quality. In the Health Insurance Marketplaces, decreased premium competition results in more tax revenue necessary to pay for premium tax credits, which increases the overall costs of operating the Marketplaces. Recent literature examines the role of inertia in Medicare Part D and employer-sponsored insurance, but little is known about how inertia impacts plan choice in the individual health insurance market. In this study, we examine inertia in health plan choice in Covered California, California’s Health Insurance Marketplace.

Covered California provides coverage to roughly 1.5 million Californians annually, making it the nation’s largest Health Insurance Marketplace. We obtain 2014-2018 Covered California individual-level enrollment data directly from Covered California through a California Public Records Act request. These data identify household plan choice, demographics, and location. Leveraging the panel nature of the data, we define a household as having inertia with respect to a given health plan if it was enrolled in that health plan in the previous year. We estimate discrete choice mixed logit models of demand to estimate households’ sensitivity to inertia, premiums, and other plan characteristics in their health plan selections. Our model is identified through the use of random coefficients on both the inertia and premium sensitivity parameters. These coefficients capture unobserved, serially correlated household characteristics that would otherwise bias our estimates.

Preliminary results indicate that inertia plays a large role in health plan choice in Covered California, despite it having a smaller proportion of enrollees with inertia than other insurance markets such as Medicare Part D. Households’ switching costs – the amount they are willing to pay to stay in the same health plan – are approximately 350 dollars. Switching costs are approximately 94 percent of mean plan premiums, suggesting that households with inertia are unlikely to switch plans between years. These results help to explain how insurers with low premiums in earlier years have maintained their market shares in later years despite increasing their premiums substantially. We also find that age and income are both positively associated with switching costs, indicating that older, higher-income households are more likely to stay with the same plan over time. Tentatively, we conclude that inertia has resulted in substantially higher funding being necessary for premium tax credits.

Future analyses, to be completed by the summer of 2018, will separate households with inertia that actively selected a new health plan versus those that automatically reenrolled in their previous plan. Distinguishing between these two groups is of interest to policymakers. If a large portion of the costs associated with inertia are a result of households not actively selecting a new health plan from year to year, the use of behavioral nudges or penalties may be appropriate to encourage active plan selections.