Regulation of Insurance with Adverse Selection and Switching Costs: Evidence from Medicare Part D

Abstract

I take advantage of the evolution of the regulatory and pricing environment in the first years of a large federal prescription drug insurance program for seniors-Medicare Part D-to empirically explore interactions among adverse selection, switching costs, and regulation. Using detailed administrative data, I document evidence of both adverse selection of beneficiaries across contracts and switching costs for beneficiaries in changing contracts within Medicare Part D. Motivated by this descriptive evidence, I formulate a model of contract choice that allows for both switching costs and private information about expected risk. Using this model, I show that switching costs are large and have quantitatively important implications for the sorting of individuals among contracts. How switching costs affect selection over time depends on the direction of changes in the contract space relative to the initial conditions. I find that in the present environment, on net, switching costs help sustain an adversely-selected equilibrium with large differences in risks between more and less generous contracts. I then simulate how switching costs could affect regulatory interventions that change the generosity of contracts. For example, I consider the tightening of the minimum standard requirement by "filling" the Part D donut hole as implemented under the Affordable Care Act. I find that absent any switching costs, this regulation would have eliminated the differences in risks across contracts; however, in the presence of the switching costs that I estimate, the effect of the policy is largely muted. JEL classification numbers: D12, I13, I18, G22

Does It Pay to Know Prices in Health Care?

“…To 3 There is a long literature that explores the impact of search frictions on equilibrium prices, price dispersion, and changes in prices over time (e.g., Stigler 1961;Diamond 1971;Burdett and Judd 1983;Hortaçsu and Syverson 2004;Hong and Shum 2006;Tappata 2009). There is also a growing literature in insurance choice and frictions in Medicare Part D (e.g., Abaluck and Gruber 2011;Miller 2014;Ho, Hogan, and Scott Morton 2015;Polyakova 2015). 4 These are not the widely available charge data, but the actual prices negotiated between the providers and insurers.…”

Private Provision of Social Insurance: Drug-Specific Price Elasticities and Cost Sharing in Medicare Part D

“…Cutler and Zeckhauser 2000; Einav et al 2013; Aron-Dine et al 2015), and the empirical literature on Medicare Part D (e.g. Abaluck and Gruber 2011, 2016; Ketcham and Simon 2008; Ketcham et al 2012, 2015; Kling et al 2012; Abaluck, Gruber, and Swanson 2015; Dalton, Gowrisankaran, and Town 2015; Decarolis 2015; Decarolis, Polyakova, and Ryan 2015; Polyakova 2016). Finally, our estimation of drug-specific elasticities contributes to the empirical literature that has estimated the price responsiveness of demand for specific drugs (e.g.…”

Essays on Private Health Insurance in Public Programs

“…Abaluck and Gruber, 2011;Handel, 2013;Miller, 2014;Ericson, 2014;Bhargava, Loewenstein, and Sydnor, 2015;Polyakova, 2016) that documents substantive inefficiencies in patients' health insurance choices, particularly with respect to health insurance switching. To the extent that patients' relative preferences for MA plans evolve over time, possibly due to bad health shocks, health outcomes may be more policy-relevant than revealed preferences.…”

“…Given the extent of health insurance switching frictions estimated in recent studies (e.g. Handel, 2013;Ericson, 2014;Miller, 2014;Polyakova, 2016), it is also possible that some cancer patients would make different health insurance choices if policies were able to reduce their switching costs.…”

“…Many other researchers (e.g. Handel, 2013;Ericson, 2014;Miller, 2014;Polyakova, 2016) find that consumers do a poor job of re-optimizing their health plan selection every year.…”