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

Publicly subsidized private health insurance markets in the United States were created under the assumption that competition would maximize consumer welfare. However, consumers in these markets are willing to pay thousands of dollars to stay in the same health plan, even after accounting for premiums and coverage generosity. While this inertial behavior can undermine welfare gains from competition, it is unclear whether policymakers should attempt to reduce it. One reason not to reduce inertia is that it may result from consumers’ desire to maintain continuity of care with their health care providers, which has strong positive effects on health. On the other hand, inertia may result from inattention and hassle costs. Using administrative data from California’s Health Insurance Marketplace, we present descriptive evidence of inertial plan choice and inattention. We then separately identify three sources of inertia—tastes for provider continuity, inattention, and hassle costs—using two-stage models of inattention and plan choice. We find that nearly all inertial plan choice results from inattention and hassle costs, the former more so than the latter. As a result of these two sources of inertia, consumers lost over a billion dollars in forgone surplus in 2018, or $1,440 to $1,584 per household per year—roughly half the annual premium paid by the median household in California’s Marketplace. We conclude that inertia is amenable to policy remediation, and that interventions to reduce hassle costs and especially inattention can improve consumer welfare and efficiency in private health insurance markets