Auto-renewal is a problem that defies easy solution

The thing that worries me most about the next few years of health reform—aside from the obvious—is the kludgy auto-renewal process for exchange plans. There were some encouraging nuggets about reforming that process tucked into 324 pages of regulations released on Friday, but this is a problem that defies easy solution.

I’ll get to the new regulations—which will take a few years to scale up in their final form—in a separate post. First I want to lay out the issue, and why it makes me anxious.

If you’re not familiar with the auto-renewal problem, the short version is that tax credit calculations are complicated and pegged to the second-lowest cost silver plan—but if you rank plans by cost, that order will change each year, and the amount of subsidy a person is entitled to will change with it if they stick with the same plan. Consumer tendency toward inertia could mean that a lot of subsidized enrollees could see unexpected premium hikes that only materialize when subsidies are reconciled. It’s the reason you’ve (hopefully) read that exchange beneficiaries should shop around during open enrollment.

Policy writers have done an admirable job articulating the problem, but I worry the message still isn’t reaching people who actually have exchange coverage—people for whom this weedy mess could become an ugly financial reality. According to Gallup, only seven percent of newly-insured exchange enrollees plan to shop around. An overwhelming 68% plan to keep their current plan; the remaining 25 percent expect to find coverage elsewhere, drop coverage, or aren’t sure.

Call me a skeptic, but I’m hard-pressed to believe two-thirds of exchange enrollees fully understand the volatile nature of subsidies and want to keep their current plans anyway.

And yes, I worry about political blowback, too. Not only is the underlying problem difficult to explain, it’s also likely to be an unhappy surprise for affected enrollees. For some, that will happen during open enrollment (when there’s still an opportunity to change plans); for others, this issue won’t become clear until taxes are filed. The assumptions implicit in auto-renewal—that an enrollee’s income hasn’t changed, and that she’s entitled to the same level of subsidy—will be reconciled against reality at tax-time. Given the way benchmark plans have shuffled around, many people will be receiving subsidies that are too high, but they won’t know until they file taxes, when they could owe the difference back to the IRS. (There are income-based caps on the amount that can be owed back for people below 400% FPL.) 

The whole situation shares uncomfortable parallels with the “if you like your plan, you can keep it” snafu: sure, people who follow the minutiae of health reform understood how the grandfather clause works, but we’re hardly a representative slice of the population.

On a less political note, Austin has previously written about how auto-enrollment can stifle the very competition that exchanges are designed to promote:

Auto-renewal also offers insurers a way to retain customers without vigorously competing for them, counting on the fact that some consumers will stick with their plans even when, rationally, they should not […] Auto-renewal exists for a reason, but if consumers rely on it too much, the results will include higher premiums and greater market power for insurers.

The lessons here aren’t limited to the ACA. Talk of Medicare reform perennially circles back to vouchers, and introducing a competitive bidding scheme—even if we just did it for Medicare Advantage—would force us to grapple the same auto-renewal issues that the exchanges are currently facing. Nobody said competition was pretty.

Adrianna (onceuponA)

Update: Clarified the paragraph about this being an unhappy surprise for enrollees—in some cases, that surprise will be immediate, in other cases the problem may not reveal itself until subsidies are reconciled upon filing taxes. Like I said, subsidy calculation are complicated. 

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