Unbiased Analysis of Today's Healthcare Issues

2016 ASSA: How does consumer inattention affect pricing?

Written By: Jason Shafrin - Jan• 06•16

Why do Medicare patients choose to stay in their current Part D prescription drug plan or switch to another? Are they rational actors maximizing their their financial benefit or do other factors play a role.

A paper by Kate Ho and co-authors (NBER WP version) presented at the 2016 ASSA meetings find the switch rates are fairly low on average. However, a few factors increase the rate of switches.   First, if the patient’s own plan increases premiums, patients are more likely to switch plans. Second, if the patient’s own plan changes coverage benefits—specifically change in deductibles and reduced coverage—switch rates also increase. Third, an acute health shock also increase the likelihood of switching plans.

Note that these effects are present even after accounting for premium levels. Higher premiums do predict plan choice, but changes in the beneficiary’s own coverage have a much larger

Eliminating the gap coverage has equivalent effect on demand as an increase in premiums of $252, and increase of deductibles of $915, or an increase of $1211 chronic total out-of-pocket cost. In other words, consumers are almost 4 times as sensitive to changes in premiums as deductibles and almost five times as sensitive to premiums as total out-of-pocket cost.

If patients choose plans rationally, they could save $1358 over a three year period. If this “inattention” factor was removed, but held premiums (but not cost sharing) constant, patients could save $170. Finally, if we removed inattention and allow premiums to adjust, consumers would save $601 through selecting better plans.

The findings of this study are very interesting and highlight that consumers basically keep the current plan unless they have reasons to switch such as changes to premiums, cost sharing, or health status. The policy implications of this paper, however, are limited. Patient attention is costly and thus patient’s trade off optimizing cost sharing with the psychic cost of attention. Further, Part D brand loyalty can also explain the stickiness of consumer choice, which may not be a bad thing if loyalty is correlated with quality.

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