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The Welfare Impact of Reducing Choice in Medicare Part D: A Comparison of Two Regulation Strategies

Author

Listed:
  • Claudio Lucarelli

    (Cornell University)

  • Jeffrey T. Prince

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • Kosali Simon

    (School of Public and Economic Affairs, Indiana University, and NBER)

Abstract

Medicare’s prescription drug benefit (Part D) has been its largest expansion of benefits since 1965. Since the implementation of Part D, many regulatory proposals have been advanced in order to improve this government-created market. Among the most debated are proposals to limit the number of options, in response to concerns that there are “too many” plans. In this paper we study the welfare impact of two feasible approaches (of similar magnitude) toward limiting the number of Part D plans: reducing the maximum number of plans each firm can offer per region and removing plans that provide doughnut hole coverage. To this end, we propose and estimate a model of market equilibrium, which we later use to evaluate the impact of regulating down the number of Part D plans. Our counterfactuals provide an important assessment of the losses to consumers (and producers) resulting from government limitations on choice. These losses must be weighed against the widely discussed expected gains due to reduced search costs from limiting options. We find that the annual search costs should be at least two thirds of the average monthly premium in order to justify a regulation that allows only two plans per firm. However, this number would be substantially lower if the limitation in the number of plans is coupled with a decrease in product differentiation (e.g., by removing plans that cover the doughnut hole). For validation purposes, we also assess the impact of a recent major merger, and find that our model performs very well out of sample.

Suggested Citation

  • 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.
  • Handle: RePEc:iuk:wpaper:2010-14
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    References listed on IDEAS

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    Cited by:

    1. Kesternich, Iris & Heiss, Florian & McFadden, Daniel & Winter, Joachim, 2013. "Suit the action to the word, the word to the action: Hypothetical choices and real decisions in Medicare Part D," Journal of Health Economics, Elsevier, vol. 32(6), pages 1313-1324.
    2. Drake, Coleman, 2019. "What are consumers willing to pay for a broad network health plan?: Evidence from covered California," Journal of Health Economics, Elsevier, vol. 65(C), pages 63-77.
    3. Maria Polyakova, 2016. "Regulation of Insurance with Adverse Selection and Switching Costs: Evidence from Medicare Part D," American Economic Journal: Applied Economics, American Economic Association, vol. 8(3), pages 165-195, July.
    4. 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.
    5. Michele Fioretti & Hongming Wang, 2020. "Performance Pay in Insurance Markets: Evidence from Medicare," Working Papers 2020.03, International Network for Economic Research - INFER.
    6. Heiss, Florian & Leive, Adam & McFadden, Daniel & Winter, Joachim, 2013. "Plan selection in Medicare Part D: Evidence from administrative data," Journal of Health Economics, Elsevier, vol. 32(6), pages 1325-1344.
    7. Chorniy, Anna & Miller, Daniel & Tang, Tilan, 2020. "Mergers in Medicare Part D: Assessing market power, cost efficiencies, and bargaining power," International Journal of Industrial Organization, Elsevier, vol. 68(C).
    8. Keane, M.P. & Thorp, S., 2016. "Complex Decision Making," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 661-709, Elsevier.
    9. 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.
    10. Georgia Kosmopoulou & Carlos Lamarche & Xueqi Zhou, 2016. "Price Adjustment Policies And Firm Size," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 895-906, April.
    11. Andrew J Barnes & Yaniv Hanoch & Melissa Martynenko & Stacey Wood & Thomas Rice & Alex D Federman, 2013. "Physician Trainees’ Decision Making and Information Processing: Choice Size and Medicare Part D," PLOS ONE, Public Library of Science, vol. 8(10), pages 1-1, October.
    12. 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.
    13. Francesco Decarolis & Maria Polyakova & Stephen P. Ryan, 2020. "Subsidy Design in Privately Provided Social Insurance: Lessons from Medicare Part D," Journal of Political Economy, University of Chicago Press, vol. 128(5), pages 1712-1752.
    14. 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.
    15. Darius Lakdawalla & Wesley Yin, 2015. "Insurers’ Negotiating Leverage and the External Effects of Medicare Part D," The Review of Economics and Statistics, MIT Press, vol. 97(2), pages 314-331, May.
    16. Yeo, Jungwon & Miller, Daniel P., 2018. "Estimating switching costs with market share data: an application to Medicare Part D," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 459-501.
    17. 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.
    18. Leemore Dafny & Jonathan Gruber & Christopher Ody, 2015. "More Insurers Lower Premiums: Evidence from Initial Pricing in the Health Insurance Marketplaces," American Journal of Health Economics, MIT Press, vol. 1(1), pages 53-81, Winter.
    19. Michael P. Keane & Susan Thorp, 2016. "Complex Decision Making: The Roles of Cognitive Limitations, Cognitive Decline and Ageing," Economics Papers 2016-W10, Economics Group, Nuffield College, University of Oxford.
    20. Leemore Dafny & Jonathan Gruber & Christopher Ody, 2014. "More Insurers Lower Premiums: Evidence from Initial Pricing in the Health Insurance Marketplaces," NBER Working Papers 20140, National Bureau of Economic Research, Inc.
    21. Abraham, Jean & Drake, Coleman & Sacks, Daniel W. & Simon, Kosali, 2017. "Demand for health insurance marketplace plans was highly elastic in 2014–2015," Economics Letters, Elsevier, vol. 159(C), pages 69-73.
    22. 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.

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    More about this item

    Keywords

    Medicare Part D; regulation; number of plans; product differentiation; discrete choice;
    All these keywords.

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L88 - Industrial Organization - - Industry Studies: Services - - - Government Policy

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