Working Paper: NBER ID: w20976
Authors: Jason Abaluck; Jonathan Gruber; Ashley Swanson
Abstract: Medicare Part D enrollees face a complicated decision problem: they must dynamically choose prescription drug consumption in each period given difficult- to-find prices and a non-linear budget set. We use Medicare Part D claims data from 2006-2009 to estimate a flexible model of consumption that accounts for non-linear budget sets, dynamic incentives due to myopia and uncertainty, and price salience. By using variation away from kink points, we are able to estimate structural models with a linear regression of consumption on coverage range prices. We then compare performance under several candidate models of expectations and coverage phase weighting. The estimates suggest small marginal price elasticities and substantial myopia; we also find evidence that salient plan characteristics impact consumption beyond their effect on out-of-pocket prices. A hyperbolic discounting model which allows for salient plan characteristics fits the data well, and outperforms both rational models and alternative behavioral models.
Keywords: Medicare Part D; Prescription Drugs; Nonlinear Budget Sets; Myopia; Price Salience
JEL Codes: D12; G22; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| donut hole coverage (I13) | prescription drug consumption (H51) |
| higher donut hole coverage (G52) | greater consumption increases (E21) |
| price elasticity of demand (D12) | prescription drug consumption (H51) |
| myopia (E71) | current consumption preference (D12) |
| salient plan characteristics (H55) | consumption behavior (D10) |
| nonlinear budget constraints (D10) | consumer behavior (D19) |