Medicare Part D Plans: The more the merrier?

Contrary to conventional wisdom, Americans may behave in more traditional economic ways when choosing prescription drugs. Recent evidence suggests that Medicare recipients switch to plans that are cheaper, given the choice. Additionally, spending more time with a status quo plan does not make one less likely to switch plans. These findings have important implications for Americans facing more health plan choices.

Economics rests somewhat uncomfortably on rationality assumptions. Recently, behavioral economists have developed further theories to reconcile seemingly irrational decisions. One of those theories is “choice overload,” which suggests that individuals become overwhelmed by too many choices. As a choice set grows, an individual is more likely to avoid choice and stick with her status quo. It also suggests that over time individuals become less likely to switch from the status quo. A classic example of choice overload is the average American supermarket.

Ketcham et al. test the choice overload predictions with Medicare Part D Prescription Drug Plan data. Started in 2006, Part D lets enrollees choose between privately offered prescription drug plans. Policy makers thought that the choice of multiple plans offering a complex array of benefits would overwhelm consumers. They worried consumers would stick with their status quo plan even if another plan was cheaper.

However, contrary to choice overload theory, Ketcham et al. finds that one year after enrollment 19-33 percent of enrollees have switched from their initial plan. By 2010, 50 percent of individuals who had enrolled between 2006 and 2009 had switched plans at least once. Part D plans thus seem to have significant turnover rates.

As a whole, enrollees saved money over time. Ketcham et al used a complex cost calculator to study price savings. It calculated out of pocket costs for each individual under each plan. It then compared what each individual paid to what she would have paid in the cheapest plan. Assuming inelastic demand for drugs from 2006 to 2008, this above-minimum payment decreased from $520 to $292 before rebounding slightly to $329 in 2010.

On average, individuals saved over $100 a year from switching plans. In 2008 and 2009, individual’s savings rose to around $200 a year on average. In 2007 about 65 percent of individuals who switched plans saved money. This figure increased to around 80 percent for 2008-2010.

Also, contrary to choice overload’s prediction individuals continued to switch plans over time. Choice overload theory suggests that after individuals make an initial choice, inertia will prevent them from switching plans to save money. Instead, the authors found that individuals were more likely to switch plans in 2008, 2009, and 2010 than they were in 2007.

The study did find some evidence of choice overload in some circumstances. The longer an individual was in the market the less responsive she was to an increase in her status quo’s plan. Individual characteristics, such as age and Alzheimer’s disease, also made enrollees less responsive to price increases. While choice overload may still impact certain demographics, it likely has less impact on the Medicare population as a whole than previously believed.

Choice overload relies on the assumption that consumers do not have hard preferences. However, consumers do appear to have strong preferences regarding healthcare, which may explain why the authors find little evidence of choice overload.

Overall, the authors find that many Medicare Part D recipients do respond to price changes in their prescription benefits. The ACA has vastly expanded the individual health insurance market and the decisions Americans face about their healthcare plans. Ketcham et al. suggests that in this new environment Americans may enjoy more choice and escape the negative consequences of choice overload.

Article Source: Ketcham, Jonathan D., Claudio Lucarelli, and Christopher A. Powers. 2015. “Paying Attention or Paying Too Much in Medicare Part D.” American Economic Review, 105(1): 204-33.

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