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Choice Inconsistencies Among the Elderly: Evidence from Plan Choice in the Medicare Part D Program

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  • Jason T. Abaluck
  • Jonathan Gruber

Abstract

The Medicare Part D Prescription Drug Plan represents the most significant privatization of the delivery of a public insurance benefit in recent history, with dozens of private insurers offering a wide range of products with varying prices and product features; the typical elder had a choice of roughly 40 stand-alone drug plans. In this paper we evaluate the choices of elders across this wide array of Part D options using a unique data set of prescription drug claims matched to information on the characteristics of choice sets. We first document that the vast majority of elders are choosing plans that are not on the "efficient portfolio" of plan choice in the sense that an alternative plan offers better risk protection at a lower cost. We then estimate several discrete choice models to document three dimensions along which elders are making choices which are inconsistent with optimization under full information: elders place much more weight on plan premiums than they do on expected out of pocket costs; they place almost no value on variance reducing aspects of plans; and they value plan financial characteristics beyond any impacts on their own financial expenses or risk.These findings are robust to a variety of specifications and econometric approaches. We develop an "adjusted" revealed preference approach that combines data from consumer choices with ex ante restrictions on preferences, and find that in a partial equilibrium setting, restricting the choice set to the three lowest average cost options would have likely raised welfare for elders under the program.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14759.

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Date of creation: Feb 2009
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Handle: RePEc:nbr:nberwo:14759

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References

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  1. Daniel A. Ackerberg & Marc Rysman, 2002. "Unobserved Product Differentiation in Discrete Choice Models: Estimating Price Elasticities and Welfare Effects," NBER Working Papers 8798, National Bureau of Economic Research, Inc.
  2. Sumit Agarwal & John C Driscoll & Xavier Gabaix & David Laibson, 2007. "The Age of Reason: Financial Decisions Over the Lifecycle," Levine's Bibliography 122247000000001752, UCLA Department of Economics.
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  5. Claudio Lucarelli & Jeffrey T. Prince & Kosali Simon, 2009. "The Welfare Impact of Reducing Choice in Medicare Part D: A Comparison of Two Regulation Strategies," Working Papers 2010-14, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  6. Marianne Bertrand & Dean S. Karlan & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," Working Papers 918, Economic Growth Center, Yale University.
  7. Florian Heiss & Daniel McFadden & Joachim Winter, 2007. "Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans," NBER Working Papers 13627, National Bureau of Economic Research, Inc.
  8. Ben Irons & Cameron Hepburn, 2007. "Regret Theory and the Tyranny of Choice," The Economic Record, The Economic Society of Australia, vol. 83(261), pages 191-203, 06.
  9. Emir Kamenica, 2008. "Contextual Inference in Markets: On the Informational Content of Product Lines," American Economic Review, American Economic Association, vol. 98(5), pages 2127-49, December.
  10. Mitchell, Olivia S. & Utkus, Stephen P. (ed.), 2004. "Pension Design and Structure: New Lessons from Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780199273393, July.
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  12. Hausman, J. A. & Abrevaya, Jason & Scott-Morton, F. M., 1998. "Misclassification of the dependent variable in a discrete-response setting," Journal of Econometrics, Elsevier, vol. 87(2), pages 239-269, September.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Abulek and Gruber - Choice Inconsistencies Among the Elderly
    by Liam Delaney in Geary Behaviour Centre on 2009-08-09 18:43:00
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Cited by:
  1. Liran Einav & Amy Finkelstein & Jonathan Levin, 2009. "Beyond Testing: Empirical Models of Insurance Markets," NBER Working Papers 15241, National Bureau of Economic Research, Inc.
  2. Leemore Dafny & Kate Ho & Mauricio Varela, 2013. "Let Them Have Choice: Gains from Shifting Away from Employer-Sponsored Health Insurance and toward an Individual Exchange," American Economic Journal: Economic Policy, American Economic Association, vol. 5(1), pages 32-58, February.
  3. Gary V. Engelhardt & Jonathan Gruber, 2009. "Medicare Part D and the Financial Protection of the Elderly," Working Papers, Center for Retirement Research at Boston College wp2009-24, Center for Retirement Research, revised Oct 2009.
  4. Amanda E. Kowalski, 2012. "Estimating the Tradeoff Between Risk Protection and Moral Hazard with a Nonlinear Budget Set Model of Health Insurance," NBER Working Papers 18108, National Bureau of Economic Research, Inc.
  5. Schram, Arthur & Sonnemans, Joep, 2011. "How individuals choose health insurance: An experimental analysis," European Economic Review, Elsevier, vol. 55(6), pages 799-819, August.
  6. Florian Heiss & Daniel McFadden & Joachim Winter, 2011. "The Demand for Medicare Part D Prescription Drug Coverage: Evidence from Four Waves of the Retirement Perspectives Survey," NBER Chapters, in: Explorations in the Economics of Aging, pages 159-182 National Bureau of Economic Research, Inc.
  7. Sinaiko, Anna D. & Hirth, Richard A., 2011. "Consumers, health insurance and dominated choices," Journal of Health Economics, Elsevier, vol. 30(2), pages 450-457, March.
  8. Darius Lakdawalla & Wesley Yin, 2009. "Insurer Bargaining and Negotiated Drug Prices in Medicare Part D," NBER Working Papers 15330, National Bureau of Economic Research, Inc.

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