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The Impact of Consumer Inattention on Insurer Pricing in the Medicare Part D Program

Author

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  • Kate Ho
  • Joseph Hogan
  • Fiona Scott Morton

Abstract

The Medicare Part D program relies on consumer choice to provide insurers with incentives to offer low-priced, high-quality pharmaceutical insurance plans. We demonstrate that consumers switch plans infrequently and search imperfectly. We estimate a model of consumer plan choice with inattentive consumers and show that high observed premiums are consistent with insurers profiting from consumer inertia. We estimate the reduction in steady state plan premiums if all consumers were attentive. An average consumer could save $1050 over three years; government savings in the same period could amount to $1.3 billion or 1% of the cost of subsidizing the relevant enrollees.

Suggested Citation

  • Kate Ho & Joseph Hogan & Fiona Scott Morton, 2015. "The Impact of Consumer Inattention on Insurer Pricing in the Medicare Part D Program," NBER Working Papers 21028, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21028
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    References listed on IDEAS

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    Cited by:

    1. Février, Philippe & Wilner, Lionel, 2016. "Do consumers correctly expect price reductions? Testing dynamic behavior," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 25-40.
    2. Amanda Starc & Robert J. Town, 2015. "Externalities and Benefit Design in Health Insurance," NBER Working Papers 21783, National Bureau of Economic Research, Inc.
    3. Marika Cabral & Michael Geruso & Neale Mahoney, 2018. "Do Larger Health Insurance Subsidies Benefit Patients or Producers? Evidence from Medicare Advantage," American Economic Review, American Economic Association, vol. 108(8), pages 2048-2087, August.
    4. 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.
    5. Jason Abaluck & Abi Adams, 2017. "What Do Consumers Consider Before They Choose? Identification from Asymmetric Demand Responses," NBER Working Papers 23566, National Bureau of Economic Research, Inc.
    6. Francesco Decarolis & Andrea Guglielmo & Calvin Luscombe, 2017. "Open Enrollment Periods and Plan Choices," NBER Working Papers 24156, National Bureau of Economic Research, Inc.
    7. Sonia Jaffe & Mark Shepard, 2017. "Price-Linked Subsidies and Health Insurance Markups," Working Papers 2017-084, Human Capital and Economic Opportunity Working Group.
    8. Sonia P. Jaffe & Mark Shepard, 2017. "Price-Linked Subsidies and Imperfect Competition in Health Insurance," NBER Working Papers 23104, National Bureau of Economic Research, Inc.
    9. Matthew Backus & Thomas Blake & Dimitriy V. Masterov & Steven Tadelis, 2017. "Expectation, Disappointment, and Exit: Reference Point Formation in a Marketplace," NBER Working Papers 23022, National Bureau of Economic Research, Inc.
    10. repec:kap:ijhcfe:v:17:y:2017:i:4:d:10.1007_s10754-017-9215-y is not listed on IDEAS
    11. Jonathan D. Ketcham & Nicolai V. Kuminoff & Christopher A. Powers, 2016. "Estimating the Heterogeneous Welfare Effects of Choice Architecture: An Application to the Medicare Prescription Drug Insurance Market," NBER Working Papers 22732, National Bureau of Economic Research, Inc.
    12. Florian Heiss & Daniel McFadden & Joachim Winter & Amelie Wuppermann & Bo Zhou, 2016. "Inattention and Switching Costs as Sources of Inertia in Medicare Part D," NBER Working Papers 22765, National Bureau of Economic Research, Inc.
    13. Cornel Kaufmann, Tobias Mueller, Andreas Hefti, Stefan Boes, 2018. "Does personalized information improve health plan choices when individuals are distracted?," Diskussionsschriften dp1808, Universitaet Bern, Departement Volkswirtschaft.
    14. Mark Shepard, 2016. "Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange," NBER Working Papers 22600, National Bureau of Economic Research, Inc.
    15. Michael Grubb, 2015. "Failing to Choose the Best Price: Theory, Evidence, and Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 303-340, November.
    16. repec:eee:jeborg:v:149:y:2018:i:c:p:197-214 is not listed on IDEAS
    17. Jason Abaluck & Jonathan Gruber, 2016. "Improving the Quality of Choices in Health Insurance Markets," NBER Working Papers 22917, National Bureau of Economic Research, Inc.
    18. Jason Abaluck & Abi Adams, 2017. "What do consumers consider before they choose? Identification from asymmetric demand responses," IFS Working Papers W17/09, Institute for Fiscal Studies.
    19. repec:aea:jecper:v:32:y:2018:i:1:p:155-78 is not listed on IDEAS
    20. Xi Chen & Lipeng Hu & Jody L. Sindelar, 2017. "Leaving Money on the Table? Suboptimal Enrollment in the New Social Pension Program in China," NBER Working Papers 24065, National Bureau of Economic Research, Inc.
    21. Aizawa, Naoki & Kim, You Suk, 2015. "Advertising and Risk Selection in Health Insurance Markets," Finance and Economics Discussion Series 2015-101, Board of Governors of the Federal Reserve System (U.S.).
    22. Nathan Kettlewell, 2016. "Policy Choice and Product Bundling in a Complicated Health Insurance Market: Do People get it Right?," Discussion Papers 2016-16, School of Economics, The University of New South Wales.

    More about this item

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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