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Inattention and Switching Costs as Sources of Inertia in Medicare Part D

Author

Listed:
  • Florian Heiss
  • Daniel McFadden
  • Joachim Winter
  • Amelie Wuppermann
  • Bo Zhou

Abstract

The trend towards giving consumers choice about their health plans has invited research on how good they actually are at making these decisions. The introduction of Medicare Part D is an important example. Initial plan choices in this market were generally far from optimal. In this paper, we focus on plan choice in the years after initial enrollment. Due to changes in plan supply, consumer health status, and prescription drug needs, consumers' optimal plans change over time. However, in Medicare Part D only about 10% of consumers switch plans every year, and on average, plan choices worsen for those who do not switch. We develop a two-stage panel data model of plan choice whose stages correspond to two separate reasons for inertia: inattention and switching costs. The model allows for unobserved heterogeneity that is correlated across the two decision stages. We estimate the model using administrative data on Medicare Part D claims from 2007 to 2010. We find that consumers are more likely to pay attention to plan choice if overspending in the last year is more salient and if their old plan gets worse, for instance due to premium increases. Moreover, conditional on attention there are significant switching costs. Separating the two stages of the switching decision is thus important when designing interventions that improve consumers' plan choice.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:22765
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    Cited by:

    1. Altmann, Steffen & Traxler, Christian & Weinschenk, Philipp, 2017. "Deadlines and Cognitive Limitations," IZA Discussion Papers 11129, Institute for the Study of Labor (IZA).
    2. 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.
    3. Francesco Decarolis & Andrea Guglielmo & Calvin Luscombe, 2017. "Open Enrollment Periods and Plan Choices," NBER Working Papers 24156, National Bureau of Economic Research, Inc.
    4. Anell, Anders & Dietrichson, Jens & Ellegård, Lina Maria & Kjellsson, Gustav, 2017. "Information, Switching Costs, and Consumer Choice: Evidence from Two Randomized Field Experiments in Swedish Primary Health Care," Working Papers 2017:7, Lund University, Department of Economics, revised 27 Jun 2018.
    5. Bischof, T.; Schmid, C.P.R.;, "undated". "Consumer Price Sensitivity and Health Plan Choice in a Regulated Competition Setting," Health, Econometrics and Data Group (HEDG) Working Papers 17/16, HEDG, c/o Department of Economics, University of York.
    6. 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.

    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
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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