Gaming the Affordable Care Act (ACA)

One of the big lessons of market design is that participants have big strategy sets. Here's a new paper that explores some of what that has implied about how the Affordable Care Act is gamed by some participants.

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

Rebecca Diamond, Michael J. Dickstein, Timothy McQuade, Petra Persson

NBER Working Paper No. 24668
Issued in May 2018
NBER Program(s):Health Care, Public Economics, Industrial Organization 

The Affordable Care Act (ACA) established health insurance marketplaces where consumers can buy individual coverage. Leveraging novel credit card and bank account micro-data, we identify new enrollees in the California marketplace and measure their health spending and premium payments. Following enrollment, we observe dramatic spikes in individuals' health care consumption. We also document widespread attrition, with more than half of all new enrollees dropping coverage before the end of the plan year. Enrollees who drop out re-time health spending to the months of insurance coverage. This drop-out behavior generates a new type of adverse selection: insurers face high costs relative to the premiums collected when they enroll strategic consumers. We show that the pattern of attrition undermines market stability and can drive insurers to exit, even absent differences in enrollees' underlying health risks. Further, using data on plan price increases, we show that insurers largely shift the costs of attrition to non-drop-out enrollees, whose inertia generates low price sensitivity. Our results suggest that campaigns to improve use of social insurance may be more efficient when they jointly target take-up and attrition.