Research Highlights Article
April 2, 2025
Hassle costs and take-up
Is paperwork an effective way to limit public program enrollment?
Source: pikselstock
Despite efforts to expand public health insurance programs in recent decades, millions of Americans remain uninsured. Many of the uninsured may be unaware of available coverage options or face administrative barriers to enrolling.
In a paper in the American Economic Review, authors Mark Shepard and Myles Wagner found that even small paperwork hassles can create large roadblocks for disadvantaged groups.
"A lot of the American healthcare system is extremely complicated, and that includes getting enrolled in health insurance," Wagner told the AEA in an interview. "The motivation for this paper was to understand how big a deal this paperwork problem is in preventing people from getting health insurance that they're completely eligible to get."
The researchers found an ideal setting to study this problem in a Massachusetts pre-ACA health insurance exchange called Commonwealth Care. Before 2010, the program automatically enrolled low-income applicants who had been approved for coverage but hadn't actively chosen a health plan. After 2010, the auto-enrollment policy was suspended; instead, applicants had to complete and return a mailed form.
This seemingly trivial change had dramatic consequences: enrollment dropped by 33 percent. One third of those eligible to receive free health insurance didn't complete the paperwork to enroll.
"The effect is really large," Wagner noted. "Other studies which have tried to get people to take up insurance by sending them nudges or extra information in the mail have had an order of magnitude smaller effect."
The researchers analyzed who the "passive enrollees" were and found that they were disproportionately younger, healthier, and male. The passive enrollees also tended to come from disadvantaged neighborhoods and communities closer to safety-net hospitals that provide charity care.
Who are passive enrollees?
The chart below shows the passive enrollment rate—the share of new enrollees who join passively—by age and sex in panel A and by a measure of medical risk in panel B.
This finding initially appeared to support an economic theory proposed by Albert Nichols and Richard Zeckhauser in the 1980s. Their theory suggested that administrative hassles could be useful targeting tools because people who value a benefit the most would be more willing to endure paperwork to get it. Indeed, Shepard and Wagner’s data showed that sicker people—who need insurance more—were more likely to complete the enrollment paperwork.
But their research also identified a crucial limitation to this theory that has been largely overlooked: in health insurance, the people who value coverage most also cost the most to insure. Conversely, the healthy people screened out by paperwork requirements cost substantially less to cover.
"The insight that we add in this paper is that the people who are screened out are healthier and so they have lower need for insurance. But exactly because they're healthier, they cost the least to cover," Wagner said. "If you account for how much it costs to provide them insurance, it's not so obvious that society actually benefits from screening them out."
To make the best use of public funds, the government wants to insure people who will get the greatest benefit from health insurance relative to the costs of providing it. But when the costs and benefits are correlated—what the authors term an “adverse selection tax”—administrative hassles fail to select individuals with the highest benefit to cost ratio, which undermines their purported targeting efficiency.
The analysis suggests that, for health insurance and similar programs with correlated benefits and costs, the optimal choice for policymakers is often either universal coverage or no program at all. The middle ground of using paperwork to target benefits becomes inefficient.
People who are screened out are healthier and so they have lower need for insurance. But exactly because they're healthier, they cost the least to cover. If you account for how much it costs to provide them insurance, it's not so obvious that society actually benefits from screening them out.
Myles Wagner
Moreover, if universal coverage is the goal, auto-enrollment policies are relatively cheap. "We found that auto-enrollment is a much more cost-effective policy for expanding take up," Wagner said.
The authors estimate that each additional $1 million in public spending covers 55 to 66 percent more people when used for auto-enrollment than when used for enticing applicants with subsidies for insurance premiums.
As policymakers search for ways to patch America's healthcare system, this research makes the case that sometimes the simplest solution—removing paperwork barriers through automatic enrollment—may also be the most efficient.
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“Do Ordeals Work for Selection Markets? Evidence from Health Insurance Auto-Enrollment” appears in the March 2024 issue of the American Economic Review.