Choice Inconsistencies Among the Elderly: Evidence from Plan Choice in the Medicare Part D Program

The Medicare Part D Prescription Drug Plan represents the most significant privatization of the delivery of a public insurance benefit in recent history, with dozens of private insurers offering a wide range of products with varying prices and product features; the typical elder had a choice of roughly 40 stand-alone drug plans. In this paper we evaluate the choices of elders across this wide array of Part D options using a unique data set of prescription drug claims matched to information on the characteristics of choice sets. We first document that the vast majority of elders are choosing plans that are not on the "efficient portfolio" of plan choice in the sense that an alternative plan offers better risk protection at a lower cost. We then estimate several discrete choice models to document three dimensions along which elders are making choices which are inconsistent with optimization under full information: elders place much more weight on plan premiums than they do on expected out of pocket costs; they place almost no value on variance reducing aspects of plans; and they value plan financial characteristics beyond any impacts on their own financial expenses or risk.These findings are robust to a variety of specifications and econometric approaches. We develop an "adjusted" revealed preference approach that combines data from consumer choices with ex ante restrictions on preferences, and find that in a partial equilibrium setting, restricting the choice set to the three lowest average cost options would have likely raised welfare for elders under the program.

Information, decision-making and health

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2011.Cataloged from PDF version of thesis.Includes bibliographical references (p. 151-155).This thesis consists of three essays on information, decision-making and health. All three concern the relationship between the choices consumers would make if they were "fully informed" in an appropriate sense and the choices we actually observe. Chapter 1 considers how we can determine whether consumers are appropriately taking into account health information when they make their food consumption decisions. The fundamental idea is to determine the value of a statistical life (VSL) implicit in food consumption decisions and to compare this value with previous estimates of the VSL. The main positive result is that the VSL estimated from food consumption is about 1/10th as large as estimates from other contexts. I also consider the normative implications under the assumption that VSL estimates from other contexts indicate how individuals would behave if they were "fully informed" and discuss what additional evidence might support such an assumption. Chapter 2, co-authored with Jonathan Gruber, performs an analogous exercise in the case of health care plans. Where Chapter 1 makes the normative assumption that consumers should value years of life equally regardless of where they come from (e.g. eating healthier foods or reducing risk of on-the-job death), Chapter 2 makes the normative assumption that consumers should value a dollar of cost savings equivalently whether it comes through premiums or out of pocket costs. This restriction can then be used to evaluate whether consumers are choosing appropriately. The chapter studies this question in the context of Medicare Part D Prescription Drug Plan, the most significant privatization of the delivery of a public insurance benefit in recent history. Chapter 3 attempts to consider the circumstances in which the partial equilibrium welfare analyses performed in parts 1 and 2 extend to a general equilibrium setting in which prices and product characteristics respond endogenously to changes in demand. In particular, Chapter 3 derives conditions under which more information leads to welfare gains in general equilibrium taking into account the endogenous response of firms' pricing and product quality decisions.by Jason Abaluck.Ph.D

NBER WORKING PAPER SERIES CHOICE INCONSISTENCIES AMONG THE ELDERLY: EVIDENCE FROM PLAN CHOICE IN THE MEDICARE PART D PROGRAM

of Aging for financial support.The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research