Sources of Consumer Inertia in the Individual Health Insurance Market

November 18, 2019

Project Summary

State-based health insurance Marketplaces were created under The Patient Protection and Affordable Care Act as platforms for subsidized health insurance plans. These Marketplaces rely on competition between insurers to minimize federal spending on subsidies while still providing enrollees with high-quality plans. Is insurer competition in the Marketplaces having the desired effects? Marketplace premiums have increased substantially over time, and concerns over narrow network health plans persist. A potential contributor to these phenomena is inertia, or persistence in health plan choices over time despite changes in health plan offerings.

A consumer has inertia in plan choice if being enrolled in a plan during the previous year increases the probability that the consumer will select that same plan in the current year. In markets with a high share of inertial consumers, firms may rely on inertia rather than competition on price or quality to retain market share.

This paper examines the causes of inertia in health insurance by examining Covered California, the largest U.S. health insurance Marketplace. The authors identify three factors that cause inertia in health plan choice:

  • The desire for continuity of care from in-network providers
  • Hassle costs from switching plans
  • Inattention to alternative plans

The authors find that each source significantly affects inertia, with tastes for continuity being the largest driver and inattention a close second.

These findings can inform health policy in important ways. The authors find that policy changes that address inattention and tastes for continuity are likely more effective at reducing inertia than regulations to reduce hassle costs. However, policies that address multiple sources of inertia are predicted to be the most effective. Without substantial policy changes that address inattention and tastes for continuity, inertia will continue to limit welfare gains from competition in the Marketplaces.

This study highlights several proposed policy changes to address inertia that are likely to have significant benefits and modest costs. For example, smart default options employ algorithms to optimally select a new default plan based on an individual’s expenses in the previous year, instead of leaving the default as last year’s choice. Another promising policy change is to require clear disclosure of which providers participate in which networks.

As policymakers consider changes to government-subsidized health insurance, it is essential to understand the role that inertia plays in health insurance and the role it will play if policy changes are enacted.