Enrolee outcomes after health insurance plan terminations: a diagnosis of default effects

Behavioural economic research has established that defaults, one form of nudge, powerfully influence choices. In most policy contexts, all individuals receive the same nudge. We present a model that analyses the optimal universal nudge for a situation in which individuals differ in their preferences and hence should make different choices and may incur a cost for resisting a nudge. Our empirical focus is on terminated choosers (TCs), individuals whose prior choices become no longer available. Specifically, we examine the power of defaults on individuals who had enrolled in Medicare Advantage plans with drug coverage and whose plans were then discontinued. Currently, if these TCs fail to actively choose another Medicare Advantage plan, they are defaulted into traditional fee-for-service Medicare (TM) without drug coverage. Overall, the rate of transition of TCs into TM is low, implying that original preferences and status quo bias overpower the default. Increasing numbers of Americans are choosing plans in health insurance exchange settings such as Medicare, the Affordable Care Act and private exchanges. Plan exits and large numbers of TCs are inevitable, along with other forms of turmoil. Any guidance and defaults provided for TCs should factor in their past revealed preferences.