Consumer Choice of Plan Factors

By May 3, 2019Commentary

Understanding general consumer behavior, and their behavior in regard to health and health care choices, is very useful, but the state of the art is not great.  New research at the National Bureau of Economic Research attempts to shed further light on the subject.  (NBER Paper)    The context for the research was choice of Medicare Part D prescription drug plan.  The authors basically suggest that there is a “rational” consumer, whose decisions reflect maximization of actual economic utility, and there is a “confused” consumer, whose choices don’t reflect that maximization, and that we can detect potential overall welfare losses.  Medicare beneficiaries are faced with a large set of Part D plans to choose from and prior research has suggested that they often don’t choose the optimal plan, given their specific circumstances.  In addition, a number of beneficiaries may have cognitive limitations or even disease that hinders good decision-making.  Understanding total likely out-of-pocket costs and pharmacy network composition is not easy even for relatively sophisticated beneficiaries.  The authors used a database of non-poor (unsubsidized) beneficiaries for the research, along with some survey data.

Among key findings is that inertia is widely observed–only about 11% of enrollees switch plans in any given year.  The second general finding is that over time consumers did appear to improve their ability to match plan to specific circumstances in a way that minimized their total out-of-pocket costs.   In general, consumers also seem to overweight premiums compared to cost-sharing, impeding an ability to understand total OOP, but this is understandable given that premiums are paid no matter what and consumers may not know for sure what drugs, and hence what cost-sharing, they will have until sometime in the future. The authors find that on average a beneficiary might still have saved over $300 a year by a more optimal plan choice, looking solely at the economics.  Network, or other perceived quality attributes, might account for some of this gap.  Consistent with learning, however, the number of plans which would be superior to the one chosen has fallen over time, suggesting consumers are getting better at finding the ideal plan, and brand and other effects may account of some of the difference.  There is a value to many people of feeling that they chose a plan that has some wide recognition–a sort of security value.   Only about 10% of consumers fall into the “rational” category, but that is on a purely economic analysis, people can have good reasons for their choices that don’t involve money–a sense of comfort about the decision for example.  But it is clear that many beneficiaries are not making good economic choices and the authors’ modeling suggests it would be hard to come up with policy changes that make a significant impact for all beneficiaries.

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