Research Highlights

Affordable Care Act Plan Dropouts May Affect the Stability of Insurance Marketplaces, According to Research from NYU Stern

New study finds some consumers strategically drop out of healthcare coverage provided through the Affordable Care Act after they use services they need, resulting in financial consequences for the participating insurance companies.

Michael Dickstein

These strategic patterns make it difficult for insurers to remain profitable, which could undermine the stability of the market if insurers exit.

According to a new joint study by NYU Stern Professor Michael Dickstein, the health insurance marketplaces created by the Affordable Care Act (ACA) have a greater potential to unravel when enrollees strategically drop in and out of coverage. In “Take-Up, Drop-Out, and Spending in ACA Marketplaces,” released this month as a working paper by the National Bureau of Economic Research and co-authored by Stanford’s Rebecca Diamond, Timothy McQuade, and Petra Persson, the researchers examine the causes and consequences that result when consumers drop out of ACA health care plans.

“When consumers re-time a year’s worth of medical care into the first few months and then stop paying for coverage for the remainder of the year, insurance companies take a financial hit,” explained Prof. Dickstein. “These strategic patterns make it difficult for insurers to remain profitable, which could undermine the stability of the market if insurers exit.”  

The ACA, also known as Obamacare, passed in March 2010 with the goal of making health insurance more accessible. It established a competitive marketplace where individuals could shop for federal and state-level health care plans. Over 2014 and 2015 – the first two years of the program – the share of Americans covered by individually purchased health insurance rose by 50 and 75 percent, respectively.

Health care consumption surged, especially in low-income households and families with young children. But, as the researchers discovered, so did attrition: Dropout was sharpest after just one month of coverage. And only half of all new enrollees committed a full year to an insurance plan.

The researchers examined 104,233 households that purchased health insurance in California either before or after the ACA came into effect to study enrollment and attrition.

“No one has been able to observe this strategic spending before,” noted Dickstein. “The drop-out behavior we were able to measure through credit and debit card activity appeared in the first year of the ACA marketplace and has increased in frequency over time.”

The researchers found that some consumers appear to drop coverage strategically after they have used the health care services they need.

While the ACA originally came with penalties for ceasing coverage early, the researchers said it was not enough. It was still cheaper for new enrollees to pay the fine for dropping out mid-year than pay a full year of annual premiums, the researchers found in their cost analysis.

If this pattern continues, Dickstein warns, the effects could be substantial. “Ultimately, this could lead to insurers exiting specific markets, potentially leaving consumers with few options for coverage.”