The difficulty consumers face in appreciating the value of plans and the resistance they exhibit in plan switching has a risk pooling effect. Think of it this way, if everyone could pick the plan that minimizes their cost, sicker individuals would end up in generous plans with higher premiums and healthier individuals in less generous plans with lower premiums. This is adverse (favorable) selection into the more (less) generous plans. That consumers don’t perfectly identify their costs under each plan and have status quo bias (inertia) undoes some of this selection.
I have long known that there is a lot of inertia under managed competition. For example, only a small percentage of federal employees switch plans every year. Of course, insurers could encourage more switching by explaining more clearly to those with health problems how they could gain financially by switching to a more generous plan. But why should they? The consumers gain is the health plan’s loss.
This is yet another way of understanding the effects of perverse incentives created by artificial health insurance markets.