NBER has a fascinating new working paper out by Amy Finkelstein, Nathaniel Hendron and Mark Shepherd. They look at the discontinuities in the Massachusetts Health Connector data to estimate willingness to pay for health insurance on the individual market.
As subsidies decline, insurance take-up falls rapidly, dropping about 25% for each $40 increase in monthly enrollee premiums. Marginal enrollees tend to be lower-cost, consistent with adverse selection into insurance. But across the entire distribution we can observe – approximately the bottom 70% of the willingness to pay distribution – enrollee willingness to pay is always less than half of own expected costs. As a result, we estimate that take-up will be highly incomplete even with generous subsidies: if enrollee premiums were 25% of insurers’ average costs, at most half of potential enrollees would buy insurance; even premiums subsidized to 10% of average costs would still leave at least 20% uninsured.
What does this mean?
Most people aren’t willing to pay the average price of care. This makes sense to me on first glance. Most people won’t run up the average claim dollar value. Health care is a concentrated. The bottom 50% of the spending uses 3% of the resources. The top 5% of the population uses half of the medical spend.
Healthy people or people who believe that they will be healthy in the next contract year won’t vlaue health insurance much because the odds of them needing tens of thousands of dollars worth of care are very low. So healthy buyers leave if the post-subsidy price is significantly higher than their expected medical costs plus a small insurance risk aversion function. This makes sense.
So what are the policy implications?
Cutting back subsidies will lead to a sicker risk pool as more marginally healthy people leave the pool. However we can’t say that increasing subsidies to the point where the typical reasonably healthy/marginal buyer is paying nothing in post-subsidy premiums will bring everyone into the pool. We saw strong evidence with the Medicaid woodworker phenomena.
In 2014, people who were Medicaid eligible but not signed up for Medicaid went on the Exchanges for the first time. They went on because they were in an environment where health insurance sign-ups were high salience and there was a lot of help to push these people onto the Exchanges. And instead of being sent to go shop for subsidized plans, the Exchanges identified that the individual was eligible for Legacy Medicaid. Legacy Medicaid has no premiums and nominal cost sharing. Yet it took a massive external force and messaging effort to get people to sign up for free to them health insurance.
In order to get people to sign up for insurance, we need very low monthly premiums, aggressive messaging and most likely a fairly significant and broadly perceived to be frequently enforced and legitimate penalty for not signing up. Or we can go for an auto-enrollment system with an opt-out.
One of my major efforts here at Balloon Juice has been promoting Silver Gap strategies. These are an explicit hack on the subsidy formula. I am advocating for creative strategies that effectively increase the subsidy benchmark which means for healthy families and individuals, their post-subsidy premiums would go down. In some counties in 2017, they could make $38,000 and pay nothing for a Silver plan.
Family of 3 (40,40,10) in 37096 $0 Silver up to $38,600. Same family in 37763 $182 for Silver and $0 Bronze #SilverGap #SilverSpam
— David Anderson (@bjdickmayhew) November 4, 2016
However, the Finkelstein et al paper show that this is a marginal strategy. It helps people get insurance, it helps improve the risk pool. It does not hurt, but it does not get everyone covered.