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

NBER Working Paper No. 21028

Issued in March 2015, Revised in March 2017

NBER Program(s):Health Care, Industrial Organization



The Medicare Part D program relies on consumer choice to provide insurers with incentives to offer low-priced, high-quality pharmaceutical insurance plans. We demonstrate that consumers switch plans infrequently and search imperfectly. We estimate a model of consumer plan choice with inattentive consumers and show that high observed premiums are consistent with insurers profiting from consumer inertia. We estimate the reduction in steady state plan premiums if all consumers were attentive. An average consumer could save $1050 over three years; government savings in the same period could amount to $1.3 billion or 1% of the cost of subsidizing the relevant enrollees.

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Acknowledgments

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Document Object Identifier (DOI): 10.3386/w21028

Published: Kate Ho & Joseph Hogan & Fiona Scott Morton, 2017. "The impact of consumer inattention on insurer pricing in the Medicare Part D program," The RAND Journal of Economics, vol 48(4), pages 877-905. citation courtesy of

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