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Choice Inconsistencies Among the Elderly: Evidence from Plan Choice in the Medicare Part D Program

  • Jason T. Abaluck
  • Jonathan Gruber

The Medicare Part D Prescription Drug Plan represents the most significant privatization of the delivery of a public insurance benefit in recent history, with dozens of private insurers offering a wide range of products with varying prices and product features; the typical elder had a choice of roughly 40 stand-alone drug plans. In this paper we evaluate the choices of elders across this wide array of Part D options using a unique data set of prescription drug claims matched to information on the characteristics of choice sets. We first document that the vast majority of elders are choosing plans that are not on the "efficient portfolio" of plan choice in the sense that an alternative plan offers better risk protection at a lower cost. We then estimate several discrete choice models to document three dimensions along which elders are making choices which are inconsistent with optimization under full information: elders place much more weight on plan premiums than they do on expected out of pocket costs; they place almost no value on variance reducing aspects of plans; and they value plan financial characteristics beyond any impacts on their own financial expenses or risk.These findings are robust to a variety of specifications and econometric approaches. We develop an "adjusted" revealed preference approach that combines data from consumer choices with ex ante restrictions on preferences, and find that in a partial equilibrium setting, restricting the choice set to the three lowest average cost options would have likely raised welfare for elders under the program.

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File URL: http://www.nber.org/papers/w14759.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14759.

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Date of creation: Feb 2009
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Publication status: published as Abaluck, Jason, and Jonathan Gruber. 2011. "Choice Inconsistencies among the Elderly: Evidence from Plan Choice in the Medicare Part D Program." American Economic Review, 101(4): 1180-1210.
Handle: RePEc:nbr:nberwo:14759
Note: AG HC HE PE
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  1. Dean Karlan & Eldar Shafir & Jonathan Zinman & Marianne Bertrand & Sendhil Mullainathan, 2006. "What's psychology worth? A field experiment in the consumer credit market," Natural Field Experiments 00217, The Field Experiments Website.
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  9. 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.
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  11. Claudio Lucarelli & Jeffrey Prince & Kosali Simon, 2012. "The Welfare Impact Of Reducing Choice In Medicare Part D: A Comparison Of Two Regulation Strategies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1155-1177, November.
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  14. 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.
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