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Mind the Gap! Consumer Perceptions and Choices

Author

Listed:
  • Florian Heiss

    ()

  • Daniel McFadden
  • Joachim Winter

    () (Munich Center for the Economics of Aging (MEA))

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.

Suggested Citation

  • Florian Heiss & Daniel McFadden & Joachim Winter, 2008. "Mind the Gap! Consumer Perceptions and Choices," MEA discussion paper series 08156, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  • Handle: RePEc:mea:meawpa:08156
    as

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    File URL: http://mea.mpisoc.mpg.de/uploads/user_mea_discussionpapers/khb1pd25f0tbrafa_156-08.pdf
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    References listed on IDEAS

    as
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    4. 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.
    5. 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.
    6. Baoping Shang & Dana P. Goldman, 2007. "Prescription Drug Coverage and Elderly Medicare Spending," NBER Working Papers 13358, National Bureau of Economic Research, Inc.
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    11. 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.
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    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

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