Medicare Part D provides prescription drug coverage through Medicare approved plans offered by private insurance companies and HMOs. In this paper, we study the role of current prescription drug use and health risks, related expectations, and subjective factors in the demand for prescription drug insurance. To characterize rational behavior in the complex Part D environment, we develop an intertemporal optimization model of enrollment decisions. We generally find that seniors' choices respond to the incentives provided by their own health status and the market environment as predicted by the optimization model. The proportion of individuals who do not attain the optimal choice is small, but the margin for error is also small since enrollment is transparently optimal for most eligible seniors. Further, there is also evidence that seniors over-react to some salient features of the choice situation, do not take full account of the future benefit and cost consequences of their decisions, or the expected net benefits and risk properties of alternative plans.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13627.
Length: Date of creation: Nov 2007 Date of revision: Handle: RePEc:nbr:nberwo:13627
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Find related papers by JEL classification: C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Microeconomic Data D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health I10 - Health, Education, and Welfare - - Health - - - General I12 - Health, Education, and Welfare - - Health - - - Health Production I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
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