NBER Working Paper No. 22876; Insurers’ Response to Selection Risk: Evidence from Medicare Enrollment Reforms
By Francesco Decarolis, Andrea Guglielmo
National Bureau of Economic Research, December 2016
Abstract
Evidence on insurers behavior in environments with both risk selection and market power is largely missing. We fill this gap by providing one of the first empirical accounts of how insurers adjust plan features when faced with potential changes in selection. Our strategy exploits a 2012 reform allowing Medicare enrollees to switch to 5-star contracts at anytime. This policy increased enrollment into 5-star contracts, but without risk selection worsening. Our findings show that this is due to 5-star plans lowering both premiums and generosity, thus becoming more appealing for most beneficiaries, but less so for those in worse health conditions.
From the Conclusions
The reform that, starting in 2012, allowed Medicare enrollees to switch at any point in time to the highest quality, 5-star plans could have backfired. By undermining the use of rigid open enrollment periods, a pillar of most insurance markets, this policy could have exacerbated the adverse selection faced by 5-star plans, potentially triggering premium spikes or even plan exit. The fact that this did not happen and that, despite the substantial growth in within-year enrollment in 5-star contracts, their risk pool did not worsen creates a puzzle.
This paper shows that a relevant force behind these facts is the sophisticated response adopted by suppliers. Both 5-star insurers and their competitors responded to the new policy. The 5-star insurers lowered their premiums, while, at the same time, worsening the amount of coverage offered by their plans. This contributed to expand their enrollment base, without worsening their risk pool.
In terms of policy, our results are both encouraging and problematic. On the one hand, the flexibility in product design that insurers retain in Medicare Pact C and D has allowed the 5-star SEP to achieve the goal of bolstering enrollment into 5-star plans. More generally, such flexibility is likely to help making the market sustainable for insurers. On the other hand, however, the very presence of such flexibility implies difficulties in designing rules capable of steering the market toward any public goal. In the context of the 5-star SEP, the reduced generosity of 5-star plans could negatively affect the well being of the weakest beneficiaries and could also represent a diminished allocative efficiency in the market.
***
Comment:
By Don McCanne, M.D.
This study adds one more bit of evidence to the abundance of studies that show that private Medicare Advantage plans will always game the system to benefit themselves to the detriment of patients.
Specifically, this program that allowed patients to change to a five-star Medicare Advantage plan during a special open enrollment period potentially exposed the insurers to adverse selection – having to accept patients with greater health care needs. Instead the insurers were able to reduce their premiums and the amount of coverage, thus expanding their enrollment bases while avoiding worsening of their risk pools.
What was the net result? This made the market more sustainable for insurers but at a cost of negatively affecting “the well being of the weakest beneficiaries,” and diminishing “allocative efficiency in the market.”
Instead of wasting taxpayer funds on embellishments that benefit the private Medicare Advantage insurers, let’s dump them and redirect our efforts to improving the traditional Medicare program so that it benefits patients instead – making it a program that would be ideal for all of us.
