Working Paper: NBER ID: w21104
Authors: Christina M. Dalton; Gautam Gowrisankaran; Robert Town
Abstract: The standard Medicare Part D drug insurance contract is nonlinear—with reduced subsidies in a coverage gap—resulting in a dynamic purchase problem. We consider enrollees who arrived near the gap early in the year and show that they should expect to enter the gap with high probability, implying that, under a benchmark model with neoclassical preferences, the gap should impact them very little. We find that these enrollees have flat spending in a period before the doughnut hole and a large spending drop in the gap, providing evidence against the benchmark model. We structurally estimate behavioral dynamic drug purchase models and find that a price salience model where enrollees do not incorporate future prices into their decision making at all fits the data best. For a nationally representative sample, full price salience would decrease enrollee spending by 31%. Entirely eliminating the gap would increase insurer spending 27%, compared to 7% for generic-drug-only gap coverage.
Keywords: Medicare Part D; Behavioral Economics; Dynamic Incentives; Drug Purchasing Behavior; Coverage Gap
JEL Codes: D03; I13; I18; L88
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Future doughnut hole prices not salient (E39) | Spending behavior of enrollees (H51) |
| Eliminating the doughnut hole (Y60) | Total spending (H59) |
| Eliminating the doughnut hole (Y60) | Insurer spending (G52) |
| Entering the doughnut hole (Y60) | Spending on prescriptions (H51) |
| Entering the doughnut hole (Y60) | Number of filled prescriptions (I11) |
| Nonlinear insurance contract of Medicare Part D (G52) | Drug purchasing behavior of enrollees (H51) |
| Behavioral hazard and nonlinear nature of insurance contract (G52) | Drug purchasing behavior of enrollees (H51) |