The Impact of Consumer Inattention on Insurer Pricing in the Medicare Part D Program

Fiona Scott Morton, Kate Ho and Joseph Hogan

No 10976, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 choice frictions were removed. In this paper we take the next analytical step and consider how plans would adjust prices if consumer search behavior improved and consumers became more elastic. Margins should fall, leading to additional consumer and government savings. 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 observed premiums are consistent with insurers profiting from consumer inertia. We use the demand parameters and a simple model of firm pricing to approximate how much lower steady state Part D plan premiums would be if consumers were attentive. Our estimates indicate that an average consumer could save over $1000 over three years when firms' lower markups are taken into account. Further, since the government pays three-quarters of the cost of the Part D program, government expenditures would also fall. Our simulations indicate the government could save $1.3 billion over three years, or 1% of the cost of subsidizing the relevant enrollees.

Keywords: Consumer inattention; Firm pricing; Health insurance (search for similar items in EconPapers)
JEL-codes: I11 L1 (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-com, nep-hea and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
https://cepr.org/publications/DP10976 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The impact of consumer inattention on insurer pricing in the Medicare Part D program (2017)
Working Paper: The Impact of Consumer Inattention on Insurer Pricing in the Medicare Part D Program (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10976

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10976
orders@cepr.org

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by (repec@cepr.org).