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Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans

In: Research Findings in the Economics of Aging

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Listed:
  • Florian Heiss
  • Daniel McFadden
  • Joachim Winter

Abstract

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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Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberch:8214
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    References listed on IDEAS

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    1. Florian Heiss & Axel Börsch-Supan & Michael Hurd & David A. Wise, 2009. "Pathways to Disability: Predicting Health Trajectories," NBER Chapters,in: Health at Older Ages: The Causes and Consequences of Declining Disability among the Elderly, pages 105-150 National Bureau of Economic Research, Inc.
    2. Patrick Bajari & Han Hong & Ahmed Khwaja, 2006. "Moral Hazard, Adverse Selection and Health Expenditures: A Semiparametric Analysis," NBER Working Papers 12445, National Bureau of Economic Research, Inc.
    3. John R. Moran & Kosali Ilayperuma Simon, 2004. "Income and the Use of Prescription Drugs by the Elderly: Evidence from the Notch Cohorts," Center for Policy Research Working Papers 66, Center for Policy Research, Maxwell School, Syracuse University.
    4. Zhou Yang & Donna B. Gilleskie & Edward C. Norton, 2004. "Prescription Drugs, Medical Care, and Health Outcomes: A Model of Elderly Health Dynamics," NBER Working Papers 10964, National Bureau of Economic Research, Inc.
    5. Daniel McFadden, 2006. "Free Markets and Fettered Consumers," American Economic Review, American Economic Association, vol. 96(1), pages 5-29, March.
    6. Tomas J. Philipson & Dana Goldman, 2007. "Integrated Insurance Design in the Presence of Multiple Medical Technologies," American Economic Review, American Economic Association, vol. 97(2), pages 427-432, May.
    7. McFadden, Daniel L., 1984. "Econometric analysis of qualitative response models," Handbook of Econometrics,in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 24, pages 1395-1457 Elsevier.
    8. Florian Heiss, 2011. "Dynamics of self-rated health and selective mortality," Empirical Economics, Springer, vol. 40(1), pages 119-140, February.
    9. Buchmueller, Thomas, 2006. "Price and the health plan choices of retirees," Journal of Health Economics, Elsevier, vol. 25(1), pages 81-101, January.
    10. Michael Baker & Mark Stabile & Catherine Deri, 2004. "What Do Self-Reported, Objective, Measures of Health Measure?," Journal of Human Resources, University of Wisconsin Press, vol. 39(4).
    11. David McAdams & Michael Schwarz, 2006. "Perverse Incentives in the Medicare Prescription Drug Benefit," NBER Working Papers 12008, National Bureau of Economic Research, Inc.
    12. Kosali I. Simon & Claudio Lucarelli, 2006. "What Drove First Year Premiums in Stand-Alone Medicare Drug Plans?," NBER Working Papers 12595, National Bureau of Economic Research, Inc.
    13. Jaap H. Abbring & James J. Heckman & Pierre-André Chiappori & Jean Pinquet, 2003. "Adverse Selection and Moral Hazard In Insurance: Can Dynamic Data Help to Distinguish?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 512-521, 04/05.
    14. Baoping Shang & Dana P. Goldman, 2007. "Prescription Drug Coverage and Elderly Medicare Spending," NBER Working Papers 13358, National Bureau of Economic Research, Inc.
    15. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, April.
    16. Florian Heiss, 2006. "Nonlinear State-Space Models for Microeconometric Panel Data," Computing in Economics and Finance 2006 285, Society for Computational Economics.
    17. James J. Heckman & Rosa Matzkin & Lars Nesheim, 2003. "Simulation and Estimation of Nonaddative Hedonic Models," NBER Working Papers 9895, National Bureau of Economic Research, Inc.
    18. Grossman, Michael, 1972. "On the Concept of Health Capital and the Demand for Health," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 223-255, March-Apr.
    19. Haiden A. Huskamp & Richard G. Frank & Kimberly A. McGuigan & Yuting Zhang, 2005. "The Impact of a Three-Tier Formulary on Demand Response for Prescription Drugs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(3), pages 729-753, September.
    20. Heiss, Florian & McFadden, Daniel L. & Winter, Joachim, 2006. "Who failed to enroll in Medicare Part D, and why? Early results," Munich Reprints in Economics 19427, University of Munich, Department of Economics.
    21. Peter Adams & Michael D. Hurd & Daniel L. McFadden & Angela Merrill & Tiago Ribeiro, 2004. "Healthy, Wealthy, and Wise? Tests for Direct Causal Paths between Health and Socioeconomic Status," NBER Chapters,in: Perspectives on the Economics of Aging, pages 415-526 National Bureau of Economic Research, Inc.
    22. Daniel McFadden & Kenneth Train, 2000. "Mixed MNL models for discrete response," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(5), pages 447-470.
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    Citations

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    Cited by:

    1. Liran Einav & Amy Finkelstein & Jonathan Levin, 2010. "Beyond Testing: Empirical Models of Insurance Markets," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 311-336, September.
    2. Christopher Afendulis & Anna Sinaiko & Richard Frank, 2014. "Dominated Choices and Medicare Advantage Enrollment," NBER Working Papers 20181, National Bureau of Economic Research, Inc.
    3. 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.
    4. Fels, Markus, 2013. "Limited Attention and the Demand for Health Insurance," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80485, Verein für Socialpolitik / German Economic Association.
    5. Vetter, Stefan & Heiss, Florian & McFadden, Daniel & Winter, Joachim, 2013. "Risk attitudes and Medicare Part D enrollment decisions," Economics Letters, Elsevier, vol. 119(2), pages 128-132.
    6. Tibor Besedeš & Cary Deck & Sudipta Sarangi & Mikhael Shor, 2012. "Age Effects and Heuristics in Decision Making," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 580-595, May.
    7. Schmitz, Hendrik & Ziebarth, Nicolas R., 2011. "In Absolute or Relative Terms? How Framing Prices Affects the Consumer Price Sensitivity of Health Plan Choice," IZA Discussion Papers 6241, Institute for the Study of Labor (IZA).
    8. Daniel McFadden & Joachim Winter & Florian Heiss, 2008. "Consumer-Directed Health Care: Can Consumers Look After Themselves?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 144(III), pages 285-307, September.
    9. repec:oup:revage:v:30:y:2008:i:3:p:379-385. is not listed on IDEAS
    10. Florian Heiss, 2011. "Dynamics of self-rated health and selective mortality," Empirical Economics, Springer, vol. 40(1), pages 119-140, February.
    11. Florian Heiss & Daniel McFadden & Joachim Winter, 2009. "Regulation of private health insurance markets: Lessons from enrollment, plan type choice, and adverse selection in Medicare Part D," NBER Working Papers 15392, National Bureau of Economic Research, Inc.
    12. Daniel McFadden, 2009. "The human side of mechanism design: a tribute to Leo Hurwicz and Jean-Jacque Laffont," Review of Economic Design, Springer;Society for Economic Design, vol. 13(1), pages 77-100, April.
    13. Francesco Decarolis, 2012. "Pricing and Incentives in Publicly Subsidized Health Care Markets: the Case of Medicare Part D," PIER Working Paper Archive 12-026, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    14. Helen Levy & David R. Weir, 2010. "Take-up of Medicare Part D: Results From the Health and Retirement Study," Journals of Gerontology: Series B, Gerontological Society of America, vol. 65(4), pages 492-501.
    15. Jason T. Abaluck & Jonathan Gruber, 2009. "Choice Inconsistencies Among the Elderly: Evidence from Plan Choice in the Medicare Part D Program," NBER Working Papers 14759, National Bureau of Economic Research, Inc.
    16. Justine S. Hastings & Ali Hortaçsu & Chad Syverson, 2013. "Sales Force and Competition in Financial Product Markets: The Case Of Mexico’s Social Security Privatization," NBER Working Papers 18881, National Bureau of Economic Research, Inc.
    17. Daniel McFadden, 2008. "Human Capital Accumulation and Depreciation," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(3), pages 379-385.
    18. Jonathan D. Ketcham & Claudio Lucarelli & Eugenio J. Miravete & M. Christopher Roebuck, 2012. "Sinking, Swimming, or Learning to Swim in Medicare Part D," American Economic Review, American Economic Association, vol. 102(6), pages 2639-2673, October.
    19. Decarolis, Francesco, 2015. "The unintended effects of the Medicare Part D low income subsidy," Health Policy, Elsevier, vol. 119(5), pages 597-603.
    20. Schram, Arthur & Sonnemans, Joep, 2011. "How individuals choose health insurance: An experimental analysis," European Economic Review, Elsevier, vol. 55(6), pages 799-819, August.
    21. 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.
    22. Afendulis, Christopher C. & Sinaiko, Anna D. & Frank, Richard G., 2015. "Dominated choices and Medicare Advantage enrollment," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 72-83.
    23. repec:eee:hapoch:v1_237 is not listed on IDEAS
    24. Fang, H., 2016. "Insurance Markets for the Elderly," Handbook of the Economics of Population Aging, Elsevier.
    25. Wuppermann, Amelie & Bauhoff, Sebastian & Grabka, Markus, 2014. "The Price Sensitivity of Health Plan Choice among Retirees: Evidence from the German Social Health Insurance," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100352, Verein für Socialpolitik / German Economic Association.

    More about this item

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • 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 Behavior
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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