By Nicole Feldman
When is the last time you took a good, hard look at your health insurance options? Do you know what changes were made to your plan last year?
If the answer is “no,” you are not alone.
According to a new study by SIEPR Faculty Fellow Maria Polyakova, most Medicare Part D enrollees do not change their plans from year to year — even though plans can change drastically.
The study, recently published in the American Economic Journal: Applied, asserts that nudging consumers to re-evaluate their coverage could save them around $500 per year in out of pocket spending and premiums.
Implemented in 2006, Part D allows Medicare users to purchase prescription drug coverage. Plans are administered by private insurance companies, but are heavily subsidized and regulated by the federal government. Consumers choose from more than 30 plans in their home state and are able to switch during a yearly open-enrollment period.
About 40 million people in the United States are enrolled in a Part D plan.
But Polyakova finds that “people do not seem to be switching contracts very often. At the same time, the contracts are changing quite dramatically every year.”
Though the study does not examine why consumers failed to switch, the data suggests that changing plans can be costly. Not necessarily a financial cost, but likely one of time or energy.
Thoroughly examining more than 30 plans on a yearly basis can be a burden, and changes are not always easy to detect.
“There are many other features of Part D plans that may change, so even if premiums appear the same, insurers may have changed other parts of coverage, such as deductible levels, co-pays and co-insurance, as well as which drugs are included,” said Polyakova, an assistant professor of health research and policy and a core faculty member of Stanford Health Policy.
Because the Part D market as a whole is dynamic, consumers can lose money even when their plan is stable.
“Even if your specific plan doesn’t change much, it is possible that it is not the best plan anymore because other plans change.”
Consumers tend to stick with the plan they picked when they first signed up. As a result, the study observes that individuals with similar needs may find themselves enrolled in very different plans if they made their first enrollment choices in different years.
This suggests that while most people likely try to pick the best coverage initially, they do not tend to re-evaluate their coverage each year in a way that fits their needs.
Polyakova believes that if the U.S. government were to more actively remind people to re-examine their plans during open enrollment, they could save consumers 20 to 30 percent.
Some researchers worry that improving individual choices and encouraging consumers to update their coverage could negatively affect the insurance market through “adverse selection.”
For example, individuals who are fairly healthy might tend to choose less generous plans than those who are relatively sick. If all those in poorer health end up in one plan, and there are no relatively low-spending enrollees to counteract the risk, the generous plan can become unsustainable.
However, the study finds evidence suggesting that for Part D, reminders to re-examine plans are unlikely to cause issues from adverse selection.
The federal government has implemented risk adjustment policies, or ways to combat the negative effects of adverse selection, that work to keep the market from unraveling. The government provides higher subsidies for sicker patients, pays the majority of patient costs and caps insurers’ profits and losses.
“From the point of view of the government, it seems that it is worthwhile to remind people who are already enrolled to reconsider their choices and potentially explain the differences across plans,” said Polyakova.
As the Affordable Care Act (ACA) changes coverage for Part D plans, reminding enrollees to re-examine their choices will become even more important. The ACA will substantially increase coverage, and plans could change considerably as a result.
While the study focuses specifically on Medicare Part D, Polyakova believes these findings likely translate to other areas of health insurance, particularly coverage under the ACA, which has many similar policies.
“The idea that we should remind consumers to re-evaluate plans has already been quite influential in the ACA policy debate,” said Polyakova. “Policymakers are tracking whether consumers are switching plans from one year to the next.”
She argues that in a consumer-driven economy, people must be able to easily make choices between products, in this case health insurance plans, for the market to function. But because choosing takes so much time and plan features are not always transparent, the forces driving the market may become weak.
Educating people about the financial benefits of switching plans could help the insurance market get back on track.
“People should try to reconsider their health risk and their insurance choices during every enrollment period,” Polyakova said. “Because if they don’t, it could have serious financial implications.”
Nicole Feldman is a Communications Associate at Stanford Health Policy.