Enrollee Choices after Their Health Plans are Terminated: Default Effects versus Persistent Preferences

Abstract

Behavioral economic research has established that defaults, one form of nudge, powerfully influence choices. In most policy contexts, all individuals receive the same nudge. We present a model that analyzes the optimal universal nudge when individuals differ in their preferences, different individuals should make different choices, and there is a cost to resist a nudge. Our empirical focus is on terminated choosers, individuals whose prior choice becomes no longer available. Specifically, we examine the power of defaults for individuals who had enrolled in Medicare Advantage with drug coverage and had their plans discountinued. Should these terminated choosers fail to actively choose another Medicare Advantage plan, they are automatically defaulted into fee-for-service Medicare absent drug coverage. Overall, the rate of transition for TCs to FFS Medicare is low, implying that original preferences and status quo bias overpowered the default. Black TCs were more susceptible to the default than non-blacks. Increasing numbers of Americans are choosing plans in health insurance exchange settings such as Medicare, the Affordable Care Act (ACA), and private exchanges. Plan exits and large numbers of TCs are inevitable, along with other forms of turmoil. Any guidance and defaults provided for TCs should attend to their past revealed preferences.

Keywords: Default Effects, Health Insurance Choice, Health Insurance Marketplaces, Status Quo Bias, Nudges, Optimal Nudges, Medicare Advantage, Affordable Care Act, Medicare, Terminated Plans