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Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug Insurance Exchange

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  • Keith M. Marzilli Ericson

Abstract

I use the Medicare Part D prescription drug insurance market to examine the dynamics of firm interaction with consumers on an insurance exchange. Enrollment data show that consumers face switching frictions leading to inertia in plan choice, and a regression discontinuity design indicates initial defaults have persistent effects. In the absence of commitment to future prices, theory predicts firms respond to inertia by raising prices on existing enrollees, while introducing cheaper alternative plans. The complete set of enrollment and price data from 2006 through 2010 confirms this prediction: older plans have approximately 10% higher premiums than comparable new plans.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18359.

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Date of creation: Sep 2012
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Publication status: published as Keith M. Marzilli Ericson, 2014. "Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug Insurance Exchange," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 38-64, February.
Handle: RePEc:nbr:nberwo:18359

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References

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  1. Joseph Farrell and Carl Shapiro., 1988. "Dynamic Competition with Switching Costs," Economics Working Papers, University of California at Berkeley 8865, University of California at Berkeley.
  2. Jason Abaluck & Jonathan Gruber, 2011. "Choice Inconsistencies among the Elderly: Evidence from Plan Choice in the Medicare Part D Program," American Economic Review, American Economic Association, American Economic Association, vol. 101(4), pages 1180-1210, June.
  3. Raj Chetty, 2012. "Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," Econometrica, Econometric Society, Econometric Society, vol. 80(3), pages 969-1018, 05.
  4. Farrell, Joseph, 1986. "A note on inertia in market share," Economics Letters, Elsevier, Elsevier, vol. 21(1), pages 73-75.
  5. Florian Heiss & Daniel McFadden & Joachim Winter, 2010. "Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans," NBER Chapters, in: Research Findings in the Economics of Aging, pages 413-481 National Bureau of Economic Research, Inc.
  6. Brigitte C. Madrian & Dennis F. Shea, 2000. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," NBER Working Papers 7682, National Bureau of Economic Research, Inc.
  7. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2009. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," NBER Working Papers 15617, National Bureau of Economic Research, Inc.
  8. Taylor, Curtis R, 2003. " Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 223-46, Summer.
  9. Jeffrey R. Kling & Sendhil Mullainathan & Eldar Shafir & Lee C. Vermeulen & Marian V. Wrobel, 2012. "Comparison Friction: Experimental Evidence from Medicare Drug Plans," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 199-235.
  10. Mark G. Duggan & Fiona Scott Morton, 2011. "The Medium-Term Impact of Medicare Part D on Pharmaceutical Prices," American Economic Review, American Economic Association, American Economic Association, vol. 101(3), pages 387-92, May.
  11. Gruber, Jonathan & Washington, Ebonya, 2005. "Subsidies to employee health insurance premiums and the health insurance market," Journal of Health Economics, Elsevier, Elsevier, vol. 24(2), pages 253-276, March.
  12. Mark Duggan & Patrick Healy & Fiona Scott Morton, 2008. "Providing Prescription Drug Coverage to the Elderly: America's Experiment with Medicare Part D," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 22(4), pages 69-92, Fall.
  13. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, Elsevier, vol. 142(2), pages 698-714, February.
  14. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, Springer, vol. 1(1), pages 7-59, March.
  15. Strombom, Bruce A. & Buchmueller, Thomas C. & Feldstein, Paul J., 2002. "Switching costs, price sensitivity and health plan choice," Journal of Health Economics, Elsevier, Elsevier, vol. 21(1), pages 89-116, January.
  16. Keith M. Marzilli Ericson, 2011. "Forgetting We Forget: Overconfidence And Memory," Journal of the European Economic Association, European Economic Association, European Economic Association, vol. 9(1), pages 43-60, 02.
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Cited by:
  1. Heiss, Florian & Leive, Adam & McFadden, Daniel & Winter, Joachim, 2012. "Plan selection in Medicare Part D: Evidence from administrative data," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 65406, Verein für Socialpolitik / German Economic Association.
  2. Keith M. Marzilli Ericson, 2014. "When Consumers Do Not Make an Active Decision: Dynamic Default Rules and their Equilibrium Effects," NBER Working Papers 20127, National Bureau of Economic Research, Inc.
  3. Chetty, Raj & Friedman, John N. & Leth-Peterson, Soren & Nielsen, Torben Heien & Olsen, Tore, 2013. "Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp13-002, Harvard University, John F. Kennedy School of Government.
  4. Keith M. Marzilli Ericson & Amanda Starc, 2012. "Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange," NBER Working Papers 18089, National Bureau of Economic Research, Inc.
  5. Christopher Afendulis & Anna Sinaiko & Richard Frank, 2014. "Dominated Choices and Medicare Advantage Enrollment," NBER Working Papers 20181, National Bureau of Economic Research, Inc.

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