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

Florian Heiss, Daniel McFadden, Joachim Winter, Amelie Wuppermann and Bo Zhou

American Economic Review, 2021, vol. 111, issue 9, 2737-81

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.

JEL-codes: D12 G22 H51 I13 I18 L65 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (25)

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DOI: 10.1257/aer.20170471

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