Selection Effects Versus Default Power: The Choices of Terminated Medicare Advantage Clients

Behavioral economic research has established the power of defaults, especially in contexts where there is significant uncertainty and high-stakes, and therefore anxiety.  These features are often present in health insurance decisions, particularly for the elderly.  We examine the role of defaults in the Medicare Advantage (MA) program, which allows the elderly to select a private health plan in lieu of Traditional Medicare (TM).  

As of 2006, beneficiaries in MA could switch plans or re-enroll in TM during one open enrollment period each year.   Beneficiaries enrolled in MA plans that withdraw from the market are forced to make a change, and those who do not actively enroll in another MA plan are defaulted into TM.  Default rules often aim to nudge people away from making errors in complex, high stakes environments. This nudge differs, and has important welfare implications because (1) there is no evidence that it was actively designed to promote superior choices for individuals, and (2) it pushes individuals towards an option that they chose actively to avoid in a prior period.

We compare choices of enrollees in health plans that exited the market (“non-voluntary” switches) with those of beneficiaries who switch out of MA plans that continue to operate in their market the next year (“voluntary” switches) in 2006-2011.  We exploit the fact that due to legislative changes, MA choices changed in number and composition during this period, including a significant number of plans that were withdrawn from the market.

Using data from the Centers for Medicare and Medicaid we construct a sample of non-disabled/non-dually eligible beneficiaries enrolled in a MA plan with Part D. We identify the beneficiary’s MA contract, estimate contract-level out-of-pocket costs (OOPC), including premiums, and record whether the contract exited the market in the subsequent year. For all switches, we estimate the probability of switching into TM and the characteristics of contracts selected by beneficiaries who stay in MA.  The key independent variable of interest is whether a beneficiary is a non-voluntary switcher.  Models also include beneficiary age, gender, race, and county, county-level number of MA plans, and year fixed effects. Standard errors are clustered. 

Preliminary analyses examined Miami-Dade county, where MA penetration has been high.  In Miami-Dade 10% of MA enrollees switched out of their MA contract each year.  Of these, 327 beneficiaries were non-voluntary switchers.  An equal proportion (9%) of voluntary and non-voluntary switchers move from MA to TM. This is contrary to the common hypothesis that defaults play a major role in influencing ultimate choices, and surprising given that elderly subjects presumably have greater difficulty overcoming defaults than would younger subjects.  Voluntary switchers who stay in MA are more likely to enroll in MA contracts with lower premiums and lower total expected OOPC than are non-voluntary switchers who stay in MA (p<0.05). This is as would be expected, since voluntary switchers presumably engaged in a self-initiated search process to find a superior plan. Our final paper will report on voluntary versus non-voluntary contract switches in all counties in the U.S.