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The Perverse Way More Exchange Competition Could Leave Some People Worse Off

health care

The goal of the Affordable Care Act exchanges was to encourage competition among private insurers, but ironically attracting more competition could leave many people the exchanges were designed to help the worst off. To understand why you need to know a few things about the structure of the law, the complexity of selecting a policy, and human nature.

New lower quality but cheaper policy won’t save much money

Many of the people using the exchanges qualify for tax credits to help purchase coverage. The size of tax credits individuals qualify for is based on what percentage of their income they will need to pay for the “reference plan” (the second cheapest policy offered at the silver level). This means for many the official price tag has no real bearing on what they pay.

Let’s say a new policy enters the exchange. Its “innovation” is offering the skimpiest coverage and narrowest network possible to qualify as a silver level plan. As a result this new hyper narrow policy is cheaper than any of the other current silver policies. The more competition on the exchange the more likely some insurers will go this route.

This would changes the “reference plan” and reduce the amount of tax credits people qualify for. That means people receiving tax credits on the exchanges will either need to pay significantly more for their old policies or switch to a new potentially worse policy to pay the same amount they did before. People getting significant tax credits on the exchange won’t really feel any potential price decreases that competition might cause, but will feel any quality decrease competition could cause.

People rarely switch policies

We know from polling data and other health care systems most people will end up staying with their old policy and pay more. Only 22 percent of exchange users say they will even try to shop around for new coverage this year. In Switzerland, which for decades has used an even simpler system of managed competition between private insurers, only about 2% to 5% change plans each year despite the fact switching plans could save people significant amounts of money.

This shouldn’t be surprising since shopping for insurance policies is very complicated, stressful and unpleasant for most people. Even if people did try to shop around every year most don’t have the knowledge and skills to do it correctly.

People face choice overload

The truly perverse part is that the more competition there is on the exchanges, the more likely people are to suffer by failing to regularly change policies, but the less likely they are to try shop around. Research on Switzerland strongly indicates people experience decision overload when it comes to changing insurance. It found, “The results showed a monotonically decreasing likelihood of switching with increasing choice. Cantons with more choices had significantly lower switching rates ceteris paribus.” It is worth noting higher insurance standardization in Switzerland makes comparing multiple plans there easier than on the ACA exchanges.

Too many complicated choices cause people to give up, yet the design of the ACA tax credit structure means it is probably most important to shop around in exchanges with the highest number of choices. More policies on the exchange likely increase the chance that the policy which is the “reference plan” will change frequently.

The Affordable Care Act was based on the premise that people could be made into consciousness insurance shoppers but that is simply not how people behave.

CommunityFDL Action

The Perverse Way More Exchange Competition Could Leave Some People Worse Off

health care

The goal of the Affordable Care Act exchanges was to encourage competition among private insurers, but ironically attracting more competition could leave many people the exchanges were designed to help the worst off. To understand why you need to know a few things about the structure of the law, the complexity of selecting a policy, and human nature.

New lower quality but cheaper policy won’t save much money

Many of the people using the exchanges qualify for tax credits to help purchase coverage. The size of tax credits individuals qualify for is based on what percentage of their income they will need to pay for the “reference plan” (the second cheapest policy offered at the silver level). This means for many the official price tag has no real bearing on what they pay.

Let’s say a new policy enters the exchange. Its “innovation” is offering the skimpiest coverage and narrowest network possible to qualify as a silver level plan. As a result this new hyper narrow policy is cheaper than any of the other current silver policies. The more competition on the exchange the more likely some insurers will go this route.

This would changes the “reference plan” and reduce the amount of tax credits people qualify for. That means people receiving tax credits on the exchanges will either need to pay significantly more for their old policies or switch to a new potentially worse policy to pay the same amount they did before. People getting significant tax credits on the exchange won’t really feel any potential price decreases that competition might cause, but will feel any quality decrease competition could cause.

People rarely switch policies

We know from polling data and other health care systems most people will end up staying with their old policy and pay more. Only 22 percent of exchange users say they will even try to shop around for new coverage this year. In Switzerland, which for decades has used an even simpler system of managed competition between private insurers, only about 2% to 5% change plans each year despite the fact switching plans could save people significant amounts of money.

This shouldn’t be surprising since shopping for insurance policies is very complicated, stressful and unpleasant for most people.  Even if people did try to shop around every year most don’t have the knowledge and skills to do it correctly.

People face choice overload

The truly perverse part is that the more competition there is on the exchanges, the more likely people are to suffer by failing to regularly change policies, but the less likely they are to try shop around. Research on Switzerland strongly indicates people experience decision overload when it comes to changing insurance. It found, “The results showed a monotonically decreasing likelihood of switching with increasing choice. Cantons with more choices had significantly lower switching rates ceteris paribus.” It is worth noting higher insurance standardization in Switzerland makes comparing multiple plans there easier than on the ACA exchanges.

Too many complicated choices cause people to give up, yet the design of the ACA tax credit structure means it is probably most important to shop around in exchanges with the highest number of choices. More policies on the exchange likely increase the chance that the policy which is the “reference plan” will change frequently.

The Affordable Care Act was based on the premise that people could be made into consciousness insurance shoppers but that is simply not how people behave.

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Jane Hamsher

Jane Hamsher

Jane is the founder of Firedoglake.com. Her work has also appeared on the Huffington Post, Alternet and The American Prospect. She’s the author of the best selling book Killer Instinct and has produced such films Natural Born Killers and Permanent Midnight. She lives in Washington DC.
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