The Impact of Imperfect Information on Health Insurance Choice, Health Outcomes, and Expenditures of the Elderly

Traditional choice models assume that individuals have full information about the set of

available products and their characteristics. However, recent empirical studies illustrate the

importance of limited information about product availability and characteristics in consumer

decision making. The market for health insurance is an important market in which the inherent

product complexity frequently leads to incomplete consideration/attention to plan alternatives

and their features. This paper investigates the dynamic impact of limited information about

the insurance alternatives available through Medicare on the expenditures and health outcomes

of the elderly, using the Medicare Current Beneficiary Survey (MCBS) dataset, which reports

individuals' knowledge about insurance plan characteristics as well as their choice of plan.

Simulations from parameter estimates obtained through joint estimation of demand equations

show that more informed individuals are more likely to supplement traditional fee-for-service

Medicare with Prescription Drug coverage and other supplemental insurance policies and, in

spite of consuming more medical care, realize lower out of pocket expenditures. Information

also has a positive impact on health outcomes of individuals with lower initial health status.