The Impact of Consumer Inattention on Insurer Pricing in the Medicare Part D Program

Ho, Katherine; Hogan, Joseph Patrick; Morton, Fiona Scott

doi:10.3386/w21028

Cited by 47 publications

(57 citation statements)

References 42 publications

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“…Note that many of the assumptions we make here are for expository purposes and will be relaxed in Section 3, where we consider a more general consideration set model. 9 9 In the existing literature, this model resembles those in Ho, Hogan, and Scott Morton (2015) and Heiss, McFadden, Winter, Wupperman, and Zhou (2016) which we consider more generally below.…”

Section: Motivating Examplementioning

confidence: 94%

“…This model can be used to identify whether inertia, and choice of defaults more generally, arises because consumers do not consider other options (and thus might be better off if they switched) or because consumers are actively choosing not to switch due to adjustment costs or persistent unobserved heterogeneity. The DSC model has been used to study inertia in health insurance and residential electricity markets (Ho, Hogan, and Scott Morton 2015;Heiss, McFadden, Winter, Wupperman, and Zhou 2016;Hortaçsu, Madanizadeh, and Puller 2015).…”

Section: Default-specific Considerationmentioning

confidence: 99%

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What Do Consumers Consider Before They Choose? Identification from Asymmetric Demand Responses

Abaluck¹,

Adams‐Prassl²

2017

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Consideration set models relax the assumption that consumers are aware of all available options. Thus far, identification arguments for these models have relied either on auxiliary data on what options were considered or on instruments excluded from consideration or utility. In a discrete choice framework subsuming logit, probit and random coefficients models, we prove that utility and consideration set probabilities can be separately identified without these data intensive methods. In full-consideration models, choice probabilities satisfy a symmetry property analogous to Slutsky symmetry in continuous choice models. This symmetry breaks down in consideration set models when changes in characteristics perturb consideration, and we show that consideration probabilities are constructively identified from the resulting asymmetries. In a lab experiment, we recover preferences and consideration probabilities using only data on which items were ultimately chosen, and we apply the model to study hotel choices on Expedia.com and insurance choices in Medicare Part D.

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Section: Motivating Examplementioning

confidence: 94%

Section: Default-specific Considerationmentioning

confidence: 99%

What Do Consumers Consider Before They Choose? Identification from Asymmetric Demand Responses

Abaluck¹,

Adams‐Prassl²

2017

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“…Ketcham et al (2012), on the other hand, conjectured that inertia may not be of key concern in Part D. The contribution of the current paper is to provide model-free evidence for the presence of inertia in Medicare Part D, and then to ask what implications the documented choice stickiness may have for the allocation of risks and consumer welfare. The paper is closest to the analyses in Ho, Hogan, and Scott Morton (2015), who explore the implications of inertia in Medicare Part D for strategic supply-side pricing. The current paper further contributes to the Part D literature by providing novel systematic evidence for the presence of adverse selection in the program.…”

mentioning

confidence: 98%

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

Polyakova

2016

American Economic Journal: Applied Economics

109

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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

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“…the evidence on Medicare in Katcham, Lucarelli, and Powers 2015); a sparsity model (Gabaix 2014); or a model of rational inattention (cf. Ho, Hogan, and Morten 2015).…”

mentioning

confidence: 95%

The Bidder's Curse: Reply

Malmendier

2016

American Economic Review

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In our paper "The Bidder's Curse" (Malmendier and Lee 2011), we introduce a novel research design to identify overbidding on eBay. We compare the final price in an auction to the fixed price at which the same item was simultaneously available on eBay. During the sample period, overbidding was surprisingly prevalent, affecting around 40-50 percent of auctions across different datasets. The overbidding percentages ranged from 0 to 72 percent for different item categories. The paper shows that such widespread overbidding is generated by a small number of bidders. Auctions emerge as a tool to "fish for fools" whose bids generate high final prices (cf. Malmendier and Szeidl 2012).Our research design has been used or discussed in a number of papers, 1 including Schneider (2016). Schneider applies the comparison to another dataset of DVD auctions. He finds a very similar range of overbidding percentages, between 0 percent and 69 percent without shipping cost and 0 percent to 83 percent with shipping cost, depending on the movie, and 23 percent on average. The emphasis of the paper, however, is different. Schneider points to users' inability to inspect all relevant eBay listings of an item, e.g., to click "Page down" or "Next page," but also to use all relevant search terms. He proposes that these failings indicate that "traditional 1 See, for example, the approaches in Herrmann, Kundisch, and Rahman (2014); Seira and Elizondo (2014); Bogliacino and Cuntz (2013); Boehnke (2013); Einav et al. (2013); and Einav et al. (2015), though note the issue of endogenous price setting when the same seller posts auction and buy-it-now (BIN) (BIN will be set high).

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The Impact of Consumer Inattention on Insurer Pricing in the Medicare Part D Program

Cited by 47 publications

References 42 publications

What Do Consumers Consider Before They Choose? Identification from Asymmetric Demand Responses

What Do Consumers Consider Before They Choose? Identification from Asymmetric Demand Responses

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

The Bidder's Curse: Reply

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