We all saw this New York Times story over the weekend about how the Trump campaign used extraordinarily aggressive and sketchy fundraising tactics last fall:
What the Blatts soon discovered was $3,000 in withdrawals by the Trump campaign in less than 30 days. They called their bank and said they thought they were victims of fraud.
“It felt,” Russell said, “like it was a scam.”
But what the Blatts believed was duplicity was actually an intentional scheme to boost revenues by the Trump campaign and the for-profit company that processed its online donations, WinRed. Facing a cash crunch and getting badly outspent by the Democrats, the campaign had begun last September to set up recurring donations by default for online donors, for every week until the election. [ my emphasis added ]
There is an amazing amount of details in the story that are well worth reading but the word that is sticking out to me is default.
Defaults matter a lot because there is a simple fact of both physics and human behavior — inertia matters a lot. It is easier to get a person to do nothing than to get them to do something. Therefore, defaults matter a lot. This is one of the key insights behind the entire “nudge” movement. Setting defaults matter because most of the time, people will not readily or easily move out of the default.
In the NY Times story, the Trump campaign used an “opt-out” default for people to make a recurring donation. The donors had the ability to move but that ability was getting buried further and further underneath an avalanche of words that were designed to impose cognitive costs and short-circuit critical thinking. Opt-outs mean a lot of people will stick around while “opt-in” solutions that require checking a box will get a lot fewer people making an active choice to make a recurring donation. Opt-outs can be beneficial; 401Ks are currently opt-out enrollment as a means of a socially beneficial nudge.
Why does this matter for health insurance?
Picking insurance is hard. Picking insurance is painful. Figuring out optimal or at least satisficing choices is demanding. People have a lot of choice inertia.
A new working paper by Brot-Goldberg and his merry gang of collaborators found that the downsides of bad defaults don’t motivate people to move insurance plans in the Medicare Part D market.
We leverage two unique natural experiments to show that, in public drug insurance for the low-income elderly in the U.S., defaults have large and persistent effects on plan enrollment and beneficiary drug utilization. We estimate that when a beneficiary’s default is exogenously changed from one year to the next, 96% of beneficiaries follow that default. We then develop a general framework for choice under costly cognition that allows for the possibility that either paternalistic defaults that steer consumers to plans that suit them (Thaler and Sunstein 2008) or ‘shocking’ defaults that trigger consumers to make active choices (Carroll et al. 2009) could be optimal. We show that optimal default design depends on a previously-overlooked parameter: The elasticity of active choice propensity with respect to the value of the default. Leveraging variation in the match value of randomly-assigned default plans, we estimate an elasticity close to zero: There is little difference in the probability of active choice between beneficiaries assigned a well-matched default versus beneficiaries assigned a poorly-matched default.
Translating this out, they took advantage of the fact that a lot of people qualify for zero premium Medicare Part D plans and when a plan left a market, these folks were re-allocated to other zero premium plans by default with an opt-out to choose something else. Almost no one chose something else even if the new default did not have the drugs that the person needed or had way more cost-sharing. There are two lines of thought on how to get people into good plans. The first is to use smarter defaults with behind the scenes technocratic tinkering that apply a set of rules to place people in plans that are not bad but may not be optimal. The second is to default people into something horrendous and use the hideousness of the choice to overcome inertia. That second option does not work in this context. In Medicare Part D, since very few people will opt-out of a bad choice, smart(er) defaults are the best option to avoid bad choices and improve aggregate choice quality.
My frequent co-author and friend Coleman Drake and two other co-authors have analyzed the ACA markets in California for inertia in another new working paper. They find big inertia effects independent of network preferences that are expensive and tough to overcome:
We find that nearly all inertial plan choice results from inattention and hassle costs, the former more so than the latter. As a result of these two sources of inertia, consumers lost over a billion dollars in forgone surplus in 2018, or $1,440 to $1,584 per household per year
Finally, Adrianna MacIntyre and team at Harvard, in a just released working paper, looked at the movement of folks who failed to pay premiums towards zero premium plans in Massachusetts. This smart default matters a lot:
Using data from Massachusetts’ health insurance exchange, we study an “automatic retention” policy intended to prevent coverage interruptions among low-income enrollees. Rather than disenroll people who lapse in paying premiums, the policy automatically switches them to an available free plan until they actively cancel or lose eligibility. We find that automatic retention has a sizable impact, switching 14% of consumers annually and differentially retaining healthy, low-cost individuals.
Any time that we expect people to actively opt-out by checking a box or setting up a payment scheme, we can expect a lot of failures for people who really would like to frictionlessly opt-out. These costs are individually small and could seem to be easily surmountable, but over time they add up to become significant hurdles that are more often taxing on cognitive load and management budgets rather than cash budgets. Active opt-outs reduce movement out of a default. Active opt-ins reduce movement into a choice that is not a default. Setting up a default and then imposing significant costs to move from that default creates inertia. The Trump campaign used this insight to very aggressively fundraise. Health insurance marketplaces can use these insights to place people into non-dominated plans and hopefully exceed that minimal goal of avoiding domination by defaulting people into plans that are pretty decent even if not optimal.