Today Austin Frakt introduces many of us to the notion of "search friction", i.e. "inefficiencies in one’s ability to wisely choose, to be a savvy shopper." Search frictions can occur when there are many plans on offer whose complexity makes comparisons between them an "apples to aardvarks" enterprise. When there are multiple plans on offer, search frictions can be a source of market power for insurers, since they enable firms to charge above competitive prices--i.e. the prices that would prevail under perfect information and understanding.
In response to Austin's post, Harold Pollack tweeted: "Search friction can be helpful to reduce adverse selection. Easy mobility & full information w/o risk adjustment is disaster." Harold's point, I take it, is that without search frictions--i.e. when individuals do have full information and thus can be savvy shoppers--shoppers will enroll in plans that in fact work best for them. So sick individuals will enroll in plans that will take care of them, thus driving up the premiums. This gives healthy people reason to avoid those plans, leaving the enrolled population sicker and causing premium rates to rise. As Harold notes, a risk adjudgment mechanism is needed in this scenario to avoid a death spiral that'll make the plan too expensive for anyone to afford.
All this reminds me of a great anecdote from David Cutler's book Your Money or Your Life (p.98):
In response to these selection concerns plans prefer to prevent high-risk people from enrolling...They can spend large resources on well-baby care (to attract healthy women) but cut back on care for the mentally ill. They can raise the cost of sharing on syringes and insulin to make it more difficult for diabetics to be in the plan. (In Germany, one plan wrote a letter to its diabetic members pointing out that another plan was far superior on diabetes care; the plan that was noted to be better complained.)
Comments