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

70 Pages Posted: 27 Oct 2016

See all articles by Florian Heiss

Florian Heiss

Heinrich Heine University Dusseldorf - Department of Economics; National Bureau of Economic Research (NBER)

Daniel L. McFadden

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Joachim K. Winter

Ludwig Maximilian University of Munich (LMU); CESifo (Center for Economic Studies and Ifo Institute); Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA); Deutsche Bundesbank - Research Department

Amelie C. Wuppermann

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics

Bo Zhou

University of Southern California

Date Written: October 2016

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

Heiss, Florian and McFadden, Daniel L. and Winter, Joachim K. and Wuppermann, Amelie C. and Zhou, Bo, Inattention and Switching Costs as Sources of Inertia in Medicare Part D (October 2016). NBER Working Paper No. w22765. Available at SSRN: https://ssrn.com/abstract=2858095

Florian Heiss (Contact Author)

Heinrich Heine University Dusseldorf - Department of Economics ( email )

Duesseldorf
Germany

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Daniel L. McFadden

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joachim K. Winter

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

Amalienstrasse 33
Munich, 80799
Germany

Deutsche Bundesbank - Research Department ( email )

PO Box 10 06 02
D60006 Frankfurt
Germany

Amelie C. Wuppermann

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

Bo Zhou

University of Southern California ( email )

635 Downey Way
Los Angeles, CA 90089-3331
United States

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