Regulation of Insurance with Adverse Selection and Switching Costs: Evidence from Medicare Part D.

2016 ◽

Vol 8 (3) ◽

pp. 165-195 ◽

Cited By ~ 28

Author(s):

Maria Polyakova

Keyword(s):

Adverse Selection ◽

Switching Costs ◽

Consumer Surplus ◽

Medicare Part D ◽

Medicare Part ◽

Pricing Model ◽

Part D ◽

Contract Choice ◽

Pricing Dynamics ◽

Per Capita

I take advantage of regulatory and pricing dynamics in Medicare Part D to explore interactions among adverse selection, inertia, and regulation. I first document novel evidence of adverse selection and switching frictions within Part D using detailed administrative data. I then estimate a contract choice and pricing model that quantifies the importance of inertia for risk sorting. I find that in Part D switching costs help sustain an adversely-selected equilibrium. I also estimate that active decision making in the existing policy environment could lead to a substantial gain in annual consumer surplus of on average $400–$600 per capita—20 percent to 30 percent of average annual spending. (JEL D82, G22, H51, I13, I18)

Download Full-text

Regulation of Insurance with Adverse Selection and Switching Costs: Evidence from Medicare Part D

SSRN Electronic Journal ◽

10.2139/ssrn.2536530 ◽

2014 ◽

Cited By ~ 1

Author(s):

Maria Polyakova

Keyword(s):

Adverse Selection ◽

Switching Costs ◽

Medicare Part D ◽

Medicare Part ◽

Part D

Download Full-text

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

The American Economic Review ◽

10.1257/aer.20170471 ◽

2021 ◽

Vol 111 (9) ◽

pp. 2737-2781

Author(s):

Florian Heiss ◽

Daniel McFadden ◽

Joachim Winter ◽

Amelie Wuppermann ◽

Bo Zhou

Keyword(s):

Data Model ◽

Switching Costs ◽

Medicare Part D ◽

Medicare Part ◽

Part D ◽

Plan Choice ◽

Using Data ◽

Two Stages ◽

Ability And Willingness ◽

Over Time

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 D12, G22, H51, I13, I18, L65)

Download Full-text

Part D Formulary and Benefit Design as a Risk-Steering Mechanism

The American Economic Review ◽

10.1257/aer.101.3.382 ◽

2011 ◽

Vol 101 (3) ◽

pp. 382-386 ◽

Cited By ~ 4

Author(s):

Dana P Goldman ◽

Geoffrey F Joyce ◽

William B Vogt

Keyword(s):

Simulation Model ◽

Adverse Selection ◽

Drug Users ◽

Medicare Part D ◽

Medicare Part ◽

Part D ◽

Benefit Design ◽

Pharmacy Claims ◽

Prescription Drug Plans ◽

Steering Mechanism

Medicare Part D relies upon drug plan competition. Plans have enormous scope to design benefits and to set premiums, but they may not charge differential premiums based on risk. We use the formulary and benefit design of all Medicare prescription drug plans and pharmacy claims data to construct a simulation model of out-of-pocket drug spending. We use this simulation model to examine individual incentives in Medicare Part D for adverse selection. We find that high drug users have much stronger incentives to enroll in generous plans than do low users, thus there is significant scope for adverse selection.

Download Full-text

The role of satisfaction and switching costs in Medicare Part D choices

Research in Social and Administrative Pharmacy ◽

10.1016/j.sapharm.2013.06.010 ◽

2014 ◽

Vol 10 (2) ◽

pp. 398-407 ◽

Cited By ~ 7

Author(s):

Jayoung Han ◽

Dong Woo Ko ◽

Julie M. Urmie

Keyword(s):

Switching Costs ◽

Medicare Part D ◽

Medicare Part ◽

Part D

Download Full-text

Strategic Formulary Design in Medicare Part D Plans

American Economic Journal Economic Policy ◽

10.1257/pol.20160248 ◽

2018 ◽

Vol 10 (3) ◽

pp. 154-192 ◽

Cited By ~ 5

Author(s):

Kurt Lavetti ◽

Kosali Simon

Keyword(s):

Health Insurance ◽

Adverse Selection ◽

Medical Insurance ◽

Medicare Part D ◽

Healthcare Spending ◽

Insurance Market ◽

Medicare Part ◽

Part D ◽

To Receive ◽

Formulary Design

The design of Medicare Part D causes most beneficiaries to receive fragmented health insurance, with drug and medical coverage separated. Fragmentation is potentially inefficient since separate insurers optimize over only one component of healthcare spending, despite complementarities and substitutabilities between healthcare types. Fragmentation of only some plans can also lead to market distortions due to differential adverse selection, as integrated plans may use drug formularies to induce enrollment by patients that are profitable in the medical insurance market. We study the design of insurance plans in Medicare Part D and find that formularies reflect these two differences in incentives. (JEL D82, G22, H51, I13, I18, L65)

Download Full-text