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

Author

Listed:
  • Heiss, Florian

    (University of Düsseldorf)

  • McFadden, Daniel

    (University of California, Berkeley)

  • Winter, Joachim

    (LMU Munich)

  • Wuppermann, Amelie

    (University of Halle-Wittenberg)

  • Zhou, Bo

    (University of Southern California, Los Angeles)

Abstract

Consumers’ health plan choices are highly persistent even though optimal plans change over time. This paper separates two sources of inertia, inattention to plan choice and switching costs. We develop a panel data model with separate attention and choice stages, linked by heterogeneity in acuity, i.e., the ability and willingness to make diligent choices. Using data from Medicare Part D, we find that inattention is an important source of inertia but switching costs also play a role, particularly for low-acuity individuals. Separating the two stages and allowing for heterogeneity is crucial for counterfactual simulations of interventions that reduce inertia.

Suggested Citation

  • Heiss, Florian & McFadden, Daniel & Winter, Joachim & Wuppermann, Amelie & Zhou, Bo, 2019. "Inattention and Switching Costs as Sources of Inertia in Medicare Part D," Rationality and Competition Discussion Paper Series 221, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:221
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    More about this item

    Keywords

    medicare; prescription drugs; health insurance demand; dynamic discrete choice;
    All these keywords.

    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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