Sources of Inertia in Health Plan Choice in the Individual Health Insurance Market

Inertia, the tendency to stay enrolled in a health plan from one year to the next, is a well-documented phenomenon in the health insurance literature. Handel and Kolstad (2015), among others, find that consumers are willing to pay hundreds of dollars per month to avoid switching health plans. However, it is less clear why consumers exhibit inertia. In this paper, we separately identify three separate reasons consumers may exhibit inertia: (1) tastes for continuity of care from in-network providers and insurers; (2) hassle costs; and (3) inattention resulting from choice frictions. While the literature has begun to explore these different sources of inertia, it has not incorporated them into a single model. We do so using a novel combination of Abaluck and Adams’s (2018) default-specific consideration model and a random parameters mixed logit model. This model allows us to separately examine inattention in plan choice and plan choice among attentive households. Our data are household-level 2014-2018 enrollment data from Covered California, California’s State-based Health Insurance Marketplace. Covered California is the nation’s largest Marketplace; it covers roughly 1.4 million enrollees each year. Preliminary results suggest that the mean household is willing to pay $77 per month to avoid the hassle of plan switching (conditional on being aware of plan characteristics) and $282 per month for continuity of care. Inattention increases total switching costs by an additional $150 per month. Tastes for continuity do not directly reduce consumer welfare – consumers may derive utility from staying with the same health care provider – but they could limit the benefits of competitive insurance markets. Choice frictions and hassle costs, in addition to having the same anti-competitive effects, reduce welfare through sub-optimal choices. Policymakers seeking to improve consumer welfare should therefore focus on reducing consumers’ choice frictions and hassle costs. Potential remedial policies include increasing outreach from insurance navigators and funding programs to educate consumers about the benefits of active health plan choice.