How Do Couples Choose Individual Insurance Plans? Evidence from Medicare Part D

This research is the first economic study to investigate how couples make enrollment choices in individual insurance markets. I leverage administrative records for Medicare Part D enrollees to distinguish widows and divorcees from married couples. I estimate a stochastic choice model of household demand that takes into account risk aversion, expenditure risk, risk sharing and inertia. I use the model estimates to study how coordination within couples and interaction between couples and singles affects the way that markets adjust to policies designed to nudge individuals toward choosing higher value plans, particularly with respect to adverse selection. The data reveals striking facts about insurance choice. Strikingly, I find that 78% of couples decide to âpoolâ by buying the same plan. This figure remains constant even for couples with extremely different health risk. My estimates imply that monetary value of plan pooling to the average couple is approximately half their monetary value of inertia, $1,584 vs $3,152. I use the model estimates to conduct several counterfactual policy experiments and find that nudging consumers to choose the plans that maximize their expected utility in a hypothetical deregulated environment without risk adjustment and premium subsidies would increase couplesâ welfare by 11% and decrease singlesâ welfare by 2% on average. Adding the federal governmentâs current risk adjustment formula increases the disparity between welfare gains for couples and welfare losses for singles. Additionally adding the federal governmentâs current formula for subsidizing plan premiums causes the policy to generate average welfare gains among both couples and singles of 36% and 5% respectively.