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Fluctuations of Affordable Care Act enrollees jeopardize market stability

A working paper from Stanford scholars finds evidence that some consumers who buy their own insurance have taken advantage of the ACA provision preventing discrimination based on preexisting conditions to strategically pop in and out of coverage in ACA marketplaces.

One of the more popular elements of the Affordable Care Act is that it prohibits insurance companies from charging higher premiums or denying coverage based on a preexisting health condition.

However, a new working paper from Stanford scholars finds evidence that some consumers who buy their own insurance have taken advantage of that provision to strategically buy, then drop coverage — despite the health law’s tax penalty for going uninsured.  The researchers suggest that consumers use insurance to defray costs of non-chronic, potentially discretionary health services, and then drop the plan and stop paying monthly premiums until they wanted coverage again. Subsidies that reduce the cost of premiums for people with lower incomes also didn't seem to curb this behavior.

Ultimately, the authors say, that pattern could prove disastrous for the health insurance marketplaces that the Affordable Care Act created for people who purchase their own plans.

As Petra Persson, PhD, assistant professor of economics at Stanford and co-author of the paper, says in a recent Stanford News Service article:

If you have too many people who drop out after a few months of coverage, you might end up in a situation where insurers don’t want to offer any insurance at all in the market.

To be clear, most Americans have health coverage through their jobs or through a government program, such as Medicaid, the paper notes. In 2013, just 4 percent of the U.S. population purchased their plan through the individual insurance market. After the ACA marketplaces were created, that number rose to 7 percent in 2015.

Using financial transaction data from before and after the health law took effect, Persson and her colleagues analyzed spending of 104,233 California households that had made at least one premium payment for an individual insurance plan. They found that only about half of all new enrollees in the 2014 and 2015 open enrollment periods paid a full year of premiums.

When it came to dropping coverage, the researchers found a pattern. As the article explains:

Pre-ACA, people often dropped out early because they experienced a loss of income, like unemployment. But post-ACA, the loss of income was much less important in explaining early dropout… The researchers found that some people strategically drop coverage after they have used the health care services they need.

Persson and her colleagues related that practice to the ACA, which prevents insurers from penalizing people for gaps in coverage. The health law charges most people a tax penalty for being uninsured — a provision that will go away in 2019 — but the researchers found that the penalty amounts in 2014 and 2015 were low enough that people could still spend less money by strategically dropping their plans.

When consumers receive high-cost health services over a brief period and then stop contributing premiums, insurers can get trapped in a downward spiral, the authors said. According to calculations in the paper, a 1 percent increase in prices leads to a 1.8 percent increase in dropout rates — when faced with higher prices, consumers with fewer health needs are likely to drop a plan. As the paper explains:

This result highlights why, despite high dropout rates leading to higher insurer average costs, insurers cannot recoup these costs through higher prices.

What can they do, then? The researchers offer two possibilities for insurers: They could require a larger share of the premium upfront or charge higher deductibles.

Either way, as Persson said, “for the ACA to continue being effective, enrollees must stay enrolled.”

Photo by Shutterstock

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