Take-Up, Drop-Out, and Spending in ACA Marketplaces

The Affordable Care Act (ACA) reformed the market for individual insurance in the United States, eliminating insurance under-writing, regulating plan characteristics, and establishing marketplaces for consumers to select coverage. Using novel credit card and bank account micro-data on over 850,000 California account holders, we identify new enrollees in the California marketplace, and examine measures of their health spending and premium payments. We find new insurance enrollees after the ACA are often of lower income and receive insurance premium subsidies; following enrollment, we observe dramatic spikes in their health consumption, with more transactions and greater out-of-pocket health care and drug spending. However, these enrollees rarely pay consistent monthly premiums: in the 2014 and 2015 open enrollment years in California, for example, only roughly half of enrollees pay all 12 months of premiums, with the sharpest drop-out observed after only one month of payments. We show this drop-out behavior generates a distinct adverse selection problem and potential market unraveling, even absent differences in enrollees' underlying health costs. We examine the pass-through of drop-out rates to premiums and consider alternative penalty designs to address this threat to market stability.