Room: Phillips 219
Time: Mon 15:00 PM-16:30 PM

Sink or Swim? Consumer Choice in Medicare Part D

Chair: Patricia Danzon (University of Pennsylvania)

Session Description

In his 2006 Presidential Address to the American Economic Association, Dan McFadden stated, “The new Medicare Part D prescription drug insurance market illustrates that leaving a large block of uniformed consumers to sink or swim, and relying on their self-interest to achieve satisfactory outcomes can be unrealistic.” This claim was made in the first week of consumers’ experience of the newly-created Part D Plan market, established by the Medicare Modernization Act (MMA) of 2003. Four years later, researchers are just beginning to be able to provide empirical evidence on consumers’ abilities to choose from the many options available. Whether consumers can choose plans appropriate for themselves or not has important implications for the welfare impacts of product differentiation. It also highlights which types of policy reforms can increase economic efficiency. Consumers may also vary in their abilities to navigate these complex choices, raising important concerns about the equity of Part D’s current design.
This session includes three of these papers using a range of data sources and methods. In the first, Jeff Prince and colleagues use a structural approach to estimate the value of various plan characteristics to consumers. With these parameters, the authors then simulate various policy reforms to estimate the welfare effects of reducing the number or type of plans available. They find substantial welfare losses from reducing the number of competing plans available, as well as losses from eliminating enhanced plans, e.g. those with donut hole coverage.
In the second paper, Kate Bundorf and Helena Szrek capitalize on a unique experiment coupled with individual-level data on cognitive ability. They focus on consumers’ decisions about whether to enroll in Part D. They find that consumers with low cognition were less likely to enroll than those with high cognition. Among those with high cognition, the effect of the number of competing plans was concave, with initially increasing but later declining likelihoods of enrollment in any PDP.
In the third paper, Jonathan Ketcham and colleagues utilize individual-level panel dataset from a large, nationwide PBM. They consider how well consumers chose in 2006 in terms of cost-minimization and their decisions to enroll vs. remain uninsured. They also use the 2007 data to analyze improvements in consumer choices. They find that patients with subsidies were typically near their cost minimizing plans in both years. Non-subsidy beneficiaries improved their performance substantially from 2006 to 2007, particularly those who chose poorly in 2006. This resulted primarily, but not exclusively, from switching to a different plan. Furthermore, consumers’ choices appear even better when a price elasticity of demand for prescription drugs of -0.54 is used instead of holding the drug consumption bundle constant across plans.

Key Terms None Listed

Session Organizer: Jonathan Ketcham (Arizona State University)

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Presentations

1. The Welfare Impact of Reducing Choice in Medicare Part D: A Comparison of Two Regulation Strategies

   Presenter: Jeff Prince (Cornell University)

   Discussant: Amanda Kowalski (Yale University)

2. Too Smart to Forgo: Cognitive Ability and Enrollment in Medicare Part D

   Presenter: Kate Bundorf (Stanford University School of Medicine)

   Discussant: Marian Wrobel (Mathematica Policy Research)

3. Free and Able to Choose: Evidence from Medicare Part D

   Presenter: Jonathan Ketcham (Arizona State University)

   Discussant: Richard Hirth (University of Michigan)