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Inattention and Switching Costs as Sources of Inertia in Medicare Part D

Author

Listed:
  • Florian Heiss
  • Daniel McFadden
  • Joachim Winter
  • Amelie Wuppermann
  • Bo Zhou

Abstract

Consumers' health plan choices are highly persistent even though optimal plans change over time. This paper separates two sources of inertia, inattention to plan choice and switching costs. We develop a panel data model with separate attention and choice stages, linked by heterogeneity in acuity, i.e., the ability and willingness to make diligent choices. Using data from Medicare Part D, we find that inattention is an important source of inertia but switching costs also play a role, particularly for low-acuity individuals. Separating the two stages and allowing for heterogeneity is crucial for counterfactual simulations of interventions that reduce inertia.

Suggested Citation

  • Florian Heiss & Daniel McFadden & Joachim Winter & Amelie Wuppermann & Bo Zhou, 2021. "Inattention and Switching Costs as Sources of Inertia in Medicare Part D," American Economic Review, American Economic Association, vol. 111(9), pages 2737-2781, September.
    • Handle: RePEc:aea:aecrev:v:111:y:2021:i:9:p:2737-81
    DOI: 10.1257/aer.20170471
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    Citations

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    Cited by:

    1. Drake, Coleman & Ryan, Conor & Dowd, Bryan, 2022. "Sources of inertia in the individual health insurance market," Journal of Public Economics, Elsevier, vol. 208(C).
    2. Karle, Heiko & Schumacher, Heiner & Vølund, Rune, 2023. "Consumer loss aversion and scale-dependent psychological switching costs," Games and Economic Behavior, Elsevier, vol. 138(C), pages 214-237.
    3. Genakos, Christos & Roumanias, Costas & Valletti, Tommaso, 2023. "Is having an expert “friend” enough? An analysis of consumer switching behavior in mobile telephony," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 359-372.
    4. Philipp Meinen & Ana Cristina Soares, 2022. "Markups and Financial Shocks," The Economic Journal, Royal Economic Society, vol. 132(647), pages 2471-2499.
    5. Victor H. Aguiar & Maria Jose Boccardi & Nail Kashaev & Jeongbin Kim, 2023. "Random utility and limited consideration," Quantitative Economics, Econometric Society, vol. 14(1), pages 71-116, January.
    6. Chen He & Tobias J. Klein, 2023. "Advertising as a Reminder: Evidence from the Dutch State Lottery," Marketing Science, INFORMS, vol. 42(5), pages 892-909, September.
    7. Levon Barseghyan & Maura Coughlin & Francesca Molinari & Joshua C. Teitelbaum, 2021. "Heterogeneous Choice Sets and Preferences," Econometrica, Econometric Society, vol. 89(5), pages 2015-2048, September.
    8. Nikhil Agarwal & Paulo J. Somaini, 2022. "Demand Analysis under Latent Choice Constraints," NBER Working Papers 29993, National Bureau of Economic Research, Inc.
    9. Levon Barseghyan & Francesca Molinari, 2023. "Risk Preference Types, Limited Consideration, and Welfare," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 41(4), pages 1011-1029, October.
    10. Dahl, Gordon B. & Forbes, Silke J., 2023. "Doctor switching costs," Journal of Public Economics, Elsevier, vol. 221(C).
    11. Heiss, Florian & Ornaghi, Carmine & Tonin, Mirco, 2021. "Inattention vs switching costs: An analysis of consumers' inaction in choosing a water tariff," DICE Discussion Papers 366, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    12. Aparna Soni, 2022. "The impact of the repeal of the federal individual insurance mandate on uninsurance," International Journal of Health Economics and Management, Springer, vol. 22(4), pages 423-441, December.
    13. Jõeveer, Karin & Kepp, Kaido, 2023. "What drives drivers? Switching, learning, and the impact of claims in car insurance," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 103(C).
    14. Steffen Altmann & Christian Traxler & Philipp Weinschenk, 2022. "Deadlines and Memory Limitations," Management Science, INFORMS, vol. 68(9), pages 6733-6750, September.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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