Financial Transaction Costs Reduce Benefit Take-Up: Evidence from Zero-Premium Health Plans in Colorado

The Affordable Care Act’s premium tax credit subsidies provide roughly seven million Americans with the choice to purchase a health insurance plan with a zero-dollar premium. Millions more are eligible for generously subsidized health plans with small, positive premiums. What difference does a premium of zero make, relative to a slightly positive premium? Using a regression discontinuity design and administrative data from Colorado’s Health Insurance Marketplace, we find that zero-premium plans increase coverage substantially. This increase is driven by lower drop-out and earlier coverage start dates, especially among lower-income households. Zero-premium plans affect coverage primarily by eliminating the transaction costs of having to make on-time payments to begin coverage. These transaction costs are equivalent in their coverage impact to a premium increase of $150 to $300, a relatively large amount for low-income families facing near-zero premiums. Transaction costs may be a meaningful barrier to take-up of subsidized insurance coverage, particularly for low-income families.