Salience, Myopia, and Complex Dynamic Incentives: Evidence from Medicare Part D

73 Pages Posted: 20 Apr 2015 Last revised: 1 Mar 2021

See all articles by Christina Dalton

Christina Dalton

Wake Forest University; University of Georgia - Terry College of Business - Department of Economics

Gautam Gowrisankaran

University of Arizona - Eller College of Management; National Bureau of Economic Research (NBER)

Robert J. Town

National Bureau of Economic Research (NBER)

Date Written: April 2015

Abstract

The standard Medicare Part D drug insurance contract is nonlinear—with reduced subsidies in a coverage gap—resulting in a dynamic purchase problem. We consider enrollees who arrived near the gap early in the year and show that they should expect to enter the gap with high probability, implying that, under a benchmark model with neoclassical preferences, the gap should impact them very little. We find that these enrollees have flat spending in a period before the doughnut hole and a large spending drop in the gap, providing evidence against the benchmark model. We structurally estimate behavioral dynamic drug purchase models and find that a price salience model where enrollees do not incorporate future prices into their decision making at all fits the data best. For a nationally representative sample, full price salience would decrease enrollee spending by 31%. Entirely eliminating the gap would increase insurer spending 27%, compared to 7% for generic-drug-only gap coverage.

Suggested Citation

Dalton, Christina and Gowrisankaran, Gautam and Town, Robert J., Salience, Myopia, and Complex Dynamic Incentives: Evidence from Medicare Part D (April 2015). NBER Working Paper No. w21104, Available at SSRN: https://ssrn.com/abstract=2596433

Christina Dalton (Contact Author)

Wake Forest University ( email )

Winston-Salem, NC 27109
United States

HOME PAGE: http://users.wfu.edu/daltonc

University of Georgia - Terry College of Business - Department of Economics ( email )

Brooks Hall
310 Herty Drive
Athens, GA 30602-6269
United States

HOME PAGE: http://people.terry.uga.edu/clmarsh

Gautam Gowrisankaran

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

HOME PAGE: http://econ.arizona.edu/faculty/gowrisankaran.asp

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert J. Town

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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