Working Paper: NBER ID: w13627
Authors: Florian Heiss; Daniel McFadden; Joachim Winter
Abstract: Medicare Part D provides prescription drug coverage through Medicare approved plans offered by private insurance companies and HMOs. In this paper, we study the role of current prescription drug use and health risks, related expectations, and subjective factors in the demand for prescription drug insurance. To characterize rational behavior in the complex Part D environment, we develop an intertemporal optimization model of enrollment decisions. We generally find that seniors' choices respond to the incentives provided by their own health status and the market environment as predicted by the optimization model. The proportion of individuals who do not attain the optimal choice is small, but the margin for error is also small since enrollment is transparently optimal for most eligible seniors. Further, there is also evidence that seniors over-react to some salient features of the choice situation, do not take full account of the future benefit and cost consequences of their decisions, or the expected net benefits and risk properties of alternative plans.
Keywords: Medicare Part D; Consumer Behavior; Health Insurance; Enrollment Decisions
JEL Codes: C25; C61; C81; D12; D91; H51; I10; I12; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Seniors' health status (I14) | Seniors' choices regarding Medicare Part D (I13) |
| Market incentives (D49) | Seniors' choices regarding Medicare Part D (I13) |
| Seniors' choices regarding Medicare Part D (I13) | Optimal choices in enrollment (I21) |
| Immediate costs and benefits (D61) | Seniors' enrollment decisions (J26) |
| Seniors' enrollment decisions (J26) | Suboptimal plan choices (D01) |
| Health needs and costs (I11) | Seniors' enrollment in beneficial plans (H55) |
| Proportion of individuals not achieving optimal choices (D91) | Disconnect between rational decision-making and actual choices (D91) |