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NBER Working Papers and Publications
|October 2016||Inattention and Switching Costs as Sources of Inertia in Medicare Part D|
with Florian Heiss, Daniel McFadden, Joachim Winter, Amelie Wuppermann: w22765
The trend towards giving consumers choice about their health plans has invited research on how good they actually are at making these decisions. The introduction of Medicare Part D is an important example. Initial plan choices in this market were generally far from optimal. In this paper, we focus on plan choice in the years after initial enrollment. Due to changes in plan supply, consumer health status, and prescription drug needs, consumers' optimal plans change over time. However, in Medicare Part D only about 10% of consumers switch plans every year, and on average, plan choices worsen for those who do not switch. We develop a two-stage panel data model of plan choice whose stages correspond to two separate reasons for inertia: inattention and switching costs. The model allows for unob...