Inattention and Switching Costs as Sources of Inertia in Medicare Part D

Florian Heiss, Daniel McFadden, Joachim Winter, Amelie Wuppermann and Bo Zhou
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Florian Heiss: University of Düsseldorf
Daniel McFadden: University of California, Berkeley
Joachim Winter: LMU Munich
Amelie Wuppermann: University of Halle-Wittenberg
Bo Zhou: University of Southern California, Los Angeles

No 221, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: Consumers’ health plan choices are highly persistent even though optimal plans change over time. This paper separates two sources of inertia, inattention to plan choice and switching costs. We develop a panel data model with separate attention and choice stages, linked by heterogeneity in acuity, i.e., the ability and willingness to make diligent choices. Using data from Medicare Part D, we find that inattention is an important source of inertia but switching costs also play a role, particularly for low-acuity individuals. Separating the two stages and allowing for heterogeneity is crucial for counterfactual simulations of interventions that reduce inertia.

Keywords: medicare; prescription drugs; health insurance demand; dynamic discrete choice (search for similar items in EconPapers)
JEL-codes: C25 D12 I13 J14 (search for similar items in EconPapers)
Date: 2019-12-18
New Economics Papers: this item is included in nep-hea and nep-ias
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:221

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