Are Low-Income Individuals Aware of and Responsive to Cost-Sharing Subsidies in the Affordable Care Act's Health Insurance Marketplaces?

The 2010 Affordable Care Act (ACA) created Health Insurance Marketplaces that offer affordable health insurance plans. The ACA helps make these plans affordable for low-income consumers by providing both premium subsidies and cost-sharing reductions (CSRs). Determining whether consumers understand and value cost-sharing subsidies for Marketplace coverage is extremely important. There is a major policy concern that individuals who are new to the insurance market lack the financial literacy to successfully navigate the ACA’s complicated provisions and perhaps are erroneously forgoing the subsidies that would otherwise make the purchase of insurance affordable. Moreover, if the ACA is to enroll a sufficient number of eligible low-income individuals so as to both remain viable and to continue to make a significant improvement in rates of insurance coverage, it is important that consumers understand the value of subsidies that limit cost-sharing in Marketplace coverage.

We use administrative data on the over 19 million health insurance plan choices of individuals who purchased a health insurance plan in either 2014 or 2015 through the Federal Marketplace in order to assess whether Marketplace consumers behave in a manner that suggests that they are aware of the availability of cost-sharing subsidies. We do this by taking advantage of discontinuous changes in the cost-sharing subsidy schedule and by implementing a sharp regression discontinuity (RD) design. Further, we use the results of this analysis to calculate the price elasticity of demand for the generosity of insurance. We also present evidence on whether consumers are forgoing cost-sharing subsidies when selecting plans. Finally, we determine the extent to which the availability of cost-sharing subsidies “crowds-out” the voluntary purchase of more generous plans versus “crowding-in” consumers who would have purchased less generous plans.

The results of our RD analysis show that consumers are highly sensitive to the availability of cost-sharing subsidies when selecting plans. Moreover, our estimate of the price elasticity of demand with respect to the generosity of insurance is 1.2. In addition, we find that fewer than 4% of CSR-eligible consumers are choosing dominated plans. Finally, while we do find evidence that the availability of CSRs crowds-out some voluntary purchases of more generous plans, we find an equal or greater amount of “crowd-in” – that is of consumers purchasing more generous plans in order to receive the subsidy. Overall, our results suggest that consumers are aware of and value Marketplace cost-sharing subsidies and that these subsidies are providing more comprehensive coverage to low-income consumers in an efficient manner.