Auto-renewal is a problem that defies easy solution — ctd.

Yesterday I wrote that auto-renewal, as it’s currently conceived, has me worried. I must not be the only one, because a new strategy was proposed in a parcel of regulations released on Friday. Sam Baker has a helpful write-up:

To tackle this problem, HHS said it’s considering offering a menu of new options when people sign up for the first time. Instead of being automatically renewed for their existing plan, consumers could ask to be switched into the cheapest plan with comparable benefits. Or, if their plans’ premiums rise by more than a certain amount—say, 5 or 10 percent—they could be automatically assigned to one of the three cheapest plans with similar benefits.

So, upon enrollment, people will prospectively choose how they want their auto-renewal to work—do they want to prioritize premium costs or provider network? One thing that’s not clear to me is what “similar benefits” guidance would look like—surely the same metal tier, but cost-sharing, drug formularies, and other features can vary across plans in the same tier. The regulations are for 2016 at the earliest (for states who want to pilot auto-renewal alternatives) and 2017 for federally-run marketplaces.

This seems like a step in the right direction: surely a menu of different renewal options is better than no menu at all? There are obvious problems—a new plan will mean a new provider network—but people who really love their doctors can keep their plan, or specify financial parameters under which they’d like to keep their plan. In theory, someday there could be a “cheaper plan but only if it has an overlapping network” option, but for now HHS is still pressing insurers to make up-to-date provider lists available at all.

Automatically moving people to lower-cost alternatives also isn’t a new idea. In Medicare Part D, some low-income enrollees have a “switching” default for drug plan renewal; if the cost of their plans increases beyond a certain threshold, they are automatically enrolled in one of the cheapest plans available, unless they sent paperwork to affirm that they wanted to keep their current coverage. Admittedly, the “network” stakes are lower in a drug plan than for traditional coverage—but Massachusetts used a similar auto-switching paradigm with health insurance for state employees in the past.

For empirical work related to this problem, you might want to start with this working paper by Keith Marzilli Ericson (a grateful hat-tip to Timothy Layton). Ericson lays out two broad reasons that people, left to their own devices, don’t change insurance plans when doing so would be financially beneficial:

  • Actual switching costs (“I like my specific doctors and benefits and am willing to pay to keep them”), or
  • Psychological factors that lead to inaction, like inattention, procrastination, and forgetfulness

People who don’t switch because of psychological factors—I’d venture that this is a wide swath of static enrollees—would be better off electing a renewal scheme that automatically moves them into cheaper alternatives. It’s important to emphasize that the rules propose making this an option for enrollees, not a requirement; the six-page summary of the rules isn’t very clear on that point.

Per Ericson’s analysis, introducing an automatic switching default would increase the elasticity of demand. Higher elasticity of demand may lead to a more competitive market, which could plausibly mean lower federal spending, in the aggregate, on tax credits.

That’s the good news. The bad news is that it sounds like a logistical nightmare for pricing plans.

Better financial certainty for enrollees comes at the expense of risk pool certainty for insurers. When submitting rates for the following enrollment cycle, insurers don’t know where their plans fall in the pricing hierarchy (though some states will share preliminary rates and allow insurers to submit new bids). Unless enrollee preferences are shared with them, insurers will face another complex variable for setting rates: how many beneficiaries do they stand to lose—if they become one of the more expensive plans—or gain, if they become one of the cheaper alternatives?

People who want to keep their networks seem more likely to be high-acuity patients, so we would expect the “switching” population to be consistently healthier, on average. Unless the risk-adjustment program—which is permanent and budget-neutral—is very effective at pooling risk across all insurers, it’s not entirely clear to me how plans left with high-cost patients could make themselves more competitive in future years to attract price-sensitive healthies. Would insurers discontinue high-cost plans and introduce new plans to re-select their desired risk pool?

Brendan Saloner raised another good question: will this lead to a proliferation of low-premium, high-cost-sharing plans? I think this is a credible worry, but it’s worth noting that low-premium options have already proven disproportionately popular; according to ASPE, 60-65% of bronze and silver enrollees selected the lowest or second-lowest cost (premium) plan. So the incentive for low-premium  plans is already there. Would this amplify that incentive? Probably. How much? I’m not sure.

Importantly, the regulations are about new enrollees; they don’t address what would happen for people who already have exchange coverage. I think—though I defer to the lawyerly types on this—that there could be legal impediments to changing the default renewal process for existing beneficiaries (but that they could be vigorously encouraged to update their preferences with their exchange).

Right now the proposed rules are a bit amorphous, as regulations awaiting comment often are. Insurers and consumer advocate groups alike are certain raise valid, complicated, and sometimes competing concerns. That’s because there isn’t a tidy solution to the auto-renewal problem—we’re looking for the least-worst strategy.

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