Salience, Myopia, and Complex Dynamic Incentives: Evidence from Medicare Part D

Abstract

The standard Medicare Part D drug insurance contract is nonlinear-with reduced subsidies in a coverage gap-resulting in a dynamic purchase problem. We consider enrollees who arrived near the gap early in the year and show that they should expect to enter the gap with high probability, implying that, under a benchmark model with neoclassical preferences, the gap should impact them very little. We find that these enrollees have flat spending in a period before the doughnut hole and a large spending drop in the gap, providing evidence against the benchmark model. We structurally estimate behavioral dynamic drug purchase models and find that a price salience model where enrollees do not incorporate future prices into their decision making at all fits the data best. For a nationally representative sample, full price salience would decrease enrollee spending by 31%. Entirely eliminating the gap would increase insurer spending 27%, compared to 7% for generic-drug-only gap coverage.

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

“…They 3 Other papers on choice rationality in Medicare Part D are: Heiss, McFadden, and Winter (2010); Heiss et al (2013); Gruber (2011, 2013); Kesternich et al (2013); Ketcham et al (2012); Kling et al (2012); Ketcham, Lucarelli, and Powers (2015); Bundorf et al (2013); Bundorf and Szrek (2010); Bundorf (2011, 2014); Zhou and Zhang (2012). 4 Other work in Medicare Part D has looked at prescription drug consumption (Yin et al 2008, Duggan and Scott Morton 2010, Ketcham and Simon 2008; the role of subsidies (Decarolis 2015;Decarolis, Polyakova, and Ryan 2015); the welfare of reducing choice or adding a public option (Lucarelli, Prince, and Simon 2012;Miller and Yeo 2015a); risk adjustment (Carey 2015); moral hazard (Einav, Finkelstein, and Schrimpf 2015), and myopia (Abaluck, Gruber, and Swanson 2015;Dalton, Gowrisankaran, and Town 2015). Duggan, Healy, and Scott Morton (2008) provide an extensive overview of the Part D's design.…”

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

“…We focus on December, which we used in our earlier work (Einav, Finkelstein, and Schrimpf 2015), because at that point forward looking behavior can reasonably be considered less important, as individuals have less uncertainty about their end-of-year price, and the relevant price associated with purchasing the drug is straightforward to measure (Abaluck, Gruber, and Swanson 2015; Dalton, Gowrisankaran, and Town 2015; Einav, Finkelstein, and Schrimpf 2015). The strategy would be even cleaner if we focused on purchasing decisions on December 31 of each year, but in order to gain statistical power a month seems a natural unit of time.…”

“…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.…”

Bunching at the kink: Implications for spending responses to health insurance contracts

“…But similar ideas have been widely applied in other settings that generate non-linear budget sets, including pensions (Manoli and Weber, forthcoming), electricity (Ito, 2014), fuel economy policy (Sallee and Slemrod, 2012), mortgages (Best et al, 2015), cell phones (Grubb, 2015; Grubb and Osborne, 2015), broadband (Nevo, Turner, and Williams, 2016), taxes on home sales (Kopczuk and Monroe, 2015; Best and Kleven, 2016), healthcare procurement (Bajari et al, 2013), and – the subject of this current paper – health insurance contracts (Abaluck, Gruber, and Swanson, 2015; Dalton, Gowrisankaran, and Town, 2015; Einav, Finkelstein, and Schrimpf, 2015). …”