Search Costs and Medicare Plan Choice

Ian M. McCarthy

Institute for Health Care Research and Improvement; Southern Methodist University (SMU)

Rusty Tchernis

Georgia State University - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)

March 2008

CAEPR Working Paper No. 2008-004

There is increasing evidence suggesting that Medicare beneficiaries do not make fully informed decisions when choosing among alternative Medicare health plans. To the extent that deciphering the intricacies of alternative plans consumes time and money, the Medicare health plan market is one in which search costs may play an important role. To account for this, we split beneficiaries into two groups - those who are informed and those who are uninformed. If uninformed, beneficiaries only use a subset of covariates to compute their maximum utilities, and if informed, they use the full set of variables considered. In a Bayesian framework with Markov Chain Monte Carlo (MCMC) methods, we estimate search cost coefficients based on the minimum and maximum statistics of the search cost distribution, incorporating both horizontal differentiation and information heterogeneities across eligibles. Our results suggest that, conditional on being uninformed, older, higher income beneficiaries with lower self-reported health status are more likely to utilize easier access to information.

Number of Pages in PDF File: 38

Keywords: Search, Medicare Health Plan Choice, Discrete Choice Models, Bayesian Methods

JEL Classification: C11, C21, D21, D43, M31

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Date posted: April 7, 2008  

Suggested Citation

McCarthy, Ian M. and Tchernis, Rusty, Search Costs and Medicare Plan Choice (March 2008). CAEPR Working Paper No. 2008-004. Available at SSRN: http://ssrn.com/abstract=1116253 or http://dx.doi.org/10.2139/ssrn.1116253

Contact Information

Center for Applied Economics And Policy Research (Contact Author)
Indiana University Bloomington - Department of Economics
Wylie Hall
Bloomington, IN 47405-6620
United States
Ian M. McCarthy
Institute for Health Care Research and Improvement ( email )
8080 N. Central Expressway
Suite 900
Dallas, TX 75206
United States
Southern Methodist University (SMU) ( email )
6212 Bishop Blvd.
Dallas, TX 75275
United States
Rusty Tchernis
Georgia State University - Department of Economics ( email )
P.O. Box 3992
Atlanta, GA 30302-3992
United States
HOME PAGE: http://www2.gsu.edu/~ecort

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA) ( email )
P.O. Box 7240
Bonn, D-53072
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