Working Paper: NBER ID: w21028
Authors: Kate Ho; Joseph Hogan; Fiona Scott Morton
Abstract: The Medicare Part D program relies on consumer choice to provide insurers with incentives to offer low-priced, high-quality pharmaceutical insurance plans. We demonstrate that consumers switch plans infrequently and search imperfectly. We estimate a model of consumer plan choice with inattentive consumers and show that high observed premiums are consistent with insurers profiting from consumer inertia. We estimate the reduction in steady state plan premiums if all consumers were attentive. An average consumer could save $1050 over three years; government savings in the same period could amount to $1.3 billion or 1% of the cost of subsidizing the relevant enrollees.
Keywords: Medicare; Consumer Inattention; Insurer Pricing; Pharmaceutical Insurance
JEL Codes: I11; L10; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumer inattention (D19) | higher premiums (G52) |
| inattention leads to infrequent switching (D91) | higher premiums (G52) |
| imperfect search behavior (D83) | higher premiums (G52) |
| consumer inattention (D19) | infrequent switching (C34) |
| consumer inattention (D19) | imperfect search behavior (D83) |
| higher premiums (G52) | government savings (D14) |
| consumer inattention (D19) | consumer savings (D14) |