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Policy Proposals

Getting the most from marketplaces: Smart policies on health insurance choice

October 7, 2015

The Problem

There is substantial evidence of consumers miscalculating their health and financial risks when choosing health insurance, which often results in extra costs that can run into hundreds of dollars. Evidence also documents consumers remaining in their selected health insurance plans, even as better and more-cost-effective options become available.

The Proposal

First, the Centers for Medicare & Medicaid Services (CMS) and the operators of state insurance exchanges should adopt and promote a narrow and personally targeted consumer search tool, which incorporates an individualized cost calculator, an assessment of risk, hospital and physician network information, and individualized preferences. Second, CMS and operators of state insurance exchanges should implement a smart default model, in which regulators switch consumers from a poorly matched to a well-matched plan during the open enrollment period.


Recent reforms to regulated U.S. health insurance markets—such as the Patient Protection and Affordable Care Act (ACA) of 2010 state exchanges and Medicare Part D—are motivated by a presumption that well-informed and active consumers will play a key role in supporting vigorous insurer competition. However, recent evidence suggests that it is difficult for many consumers to make fully informed and effective choices in these markets. The poor choices that result can lead to large financial losses for consumers, as well as for the federal and state governments who subsidize their insurance purchases. These losses manifest both from consumers choosing poor plans given those offered in the market and from the less-efficient offerings that result from less-intense insurer competition.

In this paper we propose two policies intended to improve the functioning of these markets by improving consumer choices. First, we propose that market regulators adopt and promote targeted consumer search tools that personalize choice framing and recommendations based on an individual’s specific characteristics. These tools will guide consumers toward plans that they are best suited for, while giving them the flexibility to clearly assess products on dimensions that are important to them. Second, we propose a set of more proactive smart default policies designed to improve the allocation of insurance plans when the regulator has substantial confidence that a consumer is enrolled in a poor plan match. Under our proposal, when the regulator has enough information to do so, it can “default,” or opt consumers enrolled in existing plans into different existing plans during open enrollment, when it is clear that such a switch presents an unambiguous and substantial increase in value. These smart default policies are stronger when regulators possess more consumer-specific information, and allow for consumers to actively choose any plan in the market if they wish. We lay out in detail the key components of each policy, discuss contextual factors that make each more or less appropriate, and note some potential limitations.