The Problem with Open Enrollment

Austin Frakt and Amitabh Chandra propose a common-sense idea at the New York Times:

If [health insurance] plans could compete on the basis of the therapies they cover, consumers could decide what they wish to pay for. This sounds complicated, but it need not be.

Health plans could define themselves at least in part by the value of technologies they cover, an idea proposed by Professor Russell Korobkin of the U.C.L.A. School of Law. For example, a bronze plan could cover hospitalizations and visits to doctors for emergencies and accidents; genetic diseases; and prescription drugs that keep people out of hospitals. A silver plan could cover what bronze plans do but also include treatments a large majority of physicians find useful. A gold plan could be more inclusive still, adding coverage, for instance, for every cancer therapy shown to improve patient outcomes (no matter the cost) as long as it was delivered at a leading cancer center. Finally, a platinum plan could cover experimental and unproven cancer therapies….

This proposal encounters an immediate problem:

….as people become sick, they will prefer plans that cover more treatments, including experimental ones. As sick people disproportionately choose more generous plans, their expenses and premiums will have to rise. This phenomenon, known as adverse selection, is familiar in most health insurance markets, including those for employer-sponsored plans, private plans that participate in Medicare and in the Affordable Care Act’s new marketplaces. One common way to address it is to permit individuals to switch plans only once per year, during an open enrollment period. This locks people into their choice for some time, so they can’t suddenly upgrade their plan after getting sick. If a once-per-year enrollment period proves insufficient in this case, a longer period could be imposed.

This demonstrates the inferiority of open enrollment versus another alternative, health-status insurance (also known as insurance against becoming uninsurable). For example, one area of current conflict between health plans and pharmaceutical companies is the price of specialty drugs such as Sovaldi, for Hepatitis C, which costs $84,000 for a twelve-week course.

Current open enrollment usually happens annually. Obamacare’s open enrollment period ended on March 31. Suppose someone signed up for the cheapest Bronze plan, thinking he was healthy, and then was diagnosed with Hep C in April? Under current Obamacare rules, he has to wait until November 15, 2014, to choose a better plan for January 1, 2015. And current Obamacare Gold plans would still offer skimpy coverage of Sovaldi. Under Professors Frakt’s and Chandra’s proposal, I suppose the Gold plans would offer Sovaldi for reasonable co-pays, but they would be even more nervous about adverse selection. So, they might limit open enrollment to every two years, for example.

Obviously, the person diagnosed with Hep C in April is in a much worse position than someone who remains healthy until November (in either 2014 or 2015) and can switch immediately to a plan with better coverage. This hardly seems just. Under health-status insurance, the insured person can switch plans whenever he wants, and the previous health plan pays a sum to his new health plan that is appropriate to his new health status. Of course, he pays for this optionality with a slightly higher premium initially, but the advantages far outweigh the cost.