Plan switching and inertia in Medicare Part D: Evidence from administrative data

The recent trend towards giving consumers more choice about their health plans has invited research on how good they actually are at making these decisions. Data come from private markets (such as employer-sponsored health coverage) as well as from health insurance programs that are offered or subsidized by governments.  The introduction of Medicare Part D is an important example. Several studies analyze enrollment and initial plan choices, using both survey and administrative data, with somewhat mixed findings. Generally, plan choices are found to be far from optimal in the highly complex Medicare Part D environment.

Initial plan choice is only one aspect of consumer choice in Medicare Part D. Once enrolled, consumers stay in Medicare Part D for many years, and over time they experience changes in their health and prescriptions drug needs. On the supply side, the menu of plans offered also changes from year to year. Moreover, recent reforms implement changes in the copayment and coverage structure of Medicare Part D plans such as the gradual abolishment of the infamous coverage gap. In the open enrollment period at the end of each year, enrollees therefore face a switching decision for the next year that is as complex as the initial plan choice. If consumers fail to make optimal switching choices, the welfare cost to them can be large. Inertia among consumers – the unwillingness or inability to switch to a better plan when circumstances change – also has implications for firm behavior, with potentially large effects on market outcomes and overall welfare. There is however also the possibility that plan choices improve over time as enrollees learn.

In this paper, we use administrative data on Medicare Part D claims for 2006 through 2010 to study plan switching behavior. The analysis builds on  ex ante measures of plan choice quality we constructed in earlier work. Importantly, these measures take into account the enrollees’ uncertainty about their health and prescription drug needs in the coming year. In the present paper, we adapt our earlier model of plan choice to the switching situation. We compute implicit switching costs and relate them to enrollee characteristics. We also study whether and to what extent such events as health shocks and changes in plan features and in the menu of available plans trigger plan switching. We relate our findings to the literature on the effects of consumer inertia and lock-in on firm behavior and discuss policy implications.