Premium
The impact of consumer inattention on insurer pricing in the Medicare Part D program
Author(s) -
Ho Kate,
Hogan Joseph,
Scott Morton Fiona
Publication year - 2017
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12207
Subject(s) - subsidy , consumer choice , incentive , business , actuarial science , government (linguistics) , plan (archaeology) , quality (philosophy) , economics , marketing , microeconomics , linguistics , philosophy , archaeology , epistemology , market economy , history
Abstract 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.