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The impact of consumer inattention on insurer pricing in the Medicare Part D program

Author: Katherine Ho; Joseph Hogan; Fiona Scott Morton; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2015.
Series: Working paper series (National Bureau of Economic Research), no. 21028.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Medicare Part D presents a novel privatized structure for a government pharmaceutical benefit. Incentives for firms to provide low prices and high quality are generated by consumers who choose among multiple insurance plans in each market. To date the literature has primarily focused on consumers, and has calculated how much could be saved if they chose better plans. In this paper we take the next analytical step  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Katherine Ho; Joseph Hogan; Fiona Scott Morton; National Bureau of Economic Research,
OCLC Number: 905495512
Notes: "March 2015"
Description: 1 online resource (55 pages).
Series Title: Working paper series (National Bureau of Economic Research), no. 21028.
Responsibility: Kate Ho, Joseph Hogan, Fiona Scott Morton.

Abstract:

Medicare Part D presents a novel privatized structure for a government pharmaceutical benefit. Incentives for firms to provide low prices and high quality are generated by consumers who choose among multiple insurance plans in each market. To date the literature has primarily focused on consumers, and has calculated how much could be saved if they chose better plans. In this paper we take the next analytical step and consider how plans will adjust prices as consumer search behavior improves. We use detailed data on enrollees in New Jersey to demonstrate that consumers switch plans infrequently and imperfectly. We estimate a model of consumer plan choice with inattentive consumers. We then turn to the supply side and examine insurer responses to this behavior. We show that high premiums are consistent with insurers profiting from consumer inertia. We use the demand model and a model of firm pricing to calculate how much lower Part D program costs would be if consumer inattention were removed and plans re-priced in response. Our estimates indicate that consumers would save $536 each, and the government would save $550 million total over three years, when firms' choice of markup is taken into account. Cost growth would also fall: by the last year of our sample government savings would amount to 8.2% of the cost of subsidizing the relevant enrollees.

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