The impact of consumer inattention on insurer pricing in the Medicare Part D program

Abstract

The Medicare Part D program relies on consumer choice to provide insurers with incentives to offer low‐priced, high‐quality pharmaceutical insurance plans. We demonstrate that consumers switch plans infrequently and search imperfectly. We estimate a model of consumer plan choice with inattentive consumers and show that high observed premiums are consistent with insurers profiting from consumer inertia. We estimate the reduction in steady state plan premiums if all consumers were attentive. An average consumer could save $1050 over three years; government savings in the same period could amount to $1.3 billion or 1% of the cost of subsidizing the relevant enrollees.

Estimating the Heterogeneous Welfare Effects of Choice Architecture

“…Ho et al. (), Polyakova (), and Heiss et al. () document the empirical prevalence of inertia among consumers and explore its implications for adverse selection and insurance company profits.…”

“…() and Ho et al. (), we define an enrollment choice as active if either of the following statements is true: (i) The person is new to the market and must select a plan to become insured or (ii) the person switched to a new plan during open enrollment. If neither statement is true, then the decision maker took no action during open enrollment and was automatically reenrolled in the plan she chose last year—her default—in which case we define her choice as passive .…”

“…We are unaware of any model of consumer choice among health insurance plans in general or Part D specifically that has incorporated moral hazard to allow the discrete bundle of medical care products consumed to vary within persons across plans in a way that would affect utility through expenditures and health . Excluding such moral hazard has been a standard maintained assumption in research on consumer decision making in Part D (e.g., Abaluck and Gruber, ; Ketcham et al., ; Ho et al., ) and in other health insurance markets (e.g., Erickson and Starc, 2016). Handel and Kolstad () perhaps come closest to relaxing this assumption.…”

Managed Competition in Health Insurance

“…In the Medicare context, the issue is complicated by the fact when an insurer reduces its bid, enrollees do not see a dollar reduction in their premium, but a 75 cent improvement in plan generosity. However, a fairly wide set of studies have found that consumers may not be highly price‐sensitive in choosing health plans, whether because they view plans as differentiated and value particular plan characteristics (Bundorf, Levin, and Mahoney ), or because behavioral factors such as choice inertia (Handel ), inattention (Ho, Hogan, and Scott Morton ), or optimization mistakes (Abaluck and Gruber ) lead to low price elasticity.…”

Consumer price sensitivity and health plan choice in a regulated competition setting

“…In the context of health insurance, the analysis is mostly focused on Medicare Part D. There is evidence that consumers are likely not optimizing effectively (Heiss, McFadden, Winter, Wuppermann, & Zhou, 2016), switch plans infrequently, and search imperfectly (Ho, Hogan, & Morton, 2017) and that switching probabilities decrease in the number of available health plans (Wuppermann, Bauhoff, & Grabka 2014), the time enrolled in Part (Ketcham, Lucarelli, & Powers, 2015). In Switzerland, for instance, health plans with midrange deductibles between CHF 500 and CHF 2,000 do not minimize individuals' total expenditure (i.e., premium plus co-payments) in most cases and are thus dominated by health plans with the lowest or highest deductible (CHF 300 and 2,500, respectively).…”