Understanding Active Choice in Subsidized Medicare Part D

Prior research has documented behavioral frictions that cause consumers to make suboptimal health insurance plan choices. Some of these frictions cause consumers to neglect to make choices altogether, leading them to instead “default” into whatever option the market designer has chosen for those who do not make active choices. Much of this literature has been forced to infer “defaulting” behavior instead of observing it directly, due to a lack of direct measures of active choice/attention in administrative data, limiting researchers’ ability to understand this behavior. Furthermore, this inference process also limits the ability of researchers to separate out the different sources of these frictions, which may be observationally equivalent in existing data.

In this paper, we investigate the nature of active decision-making in the context of low-income (“dual-eligible”) beneficiaries in Medicare Part D. In this setting, beneficiaries of Part D who receive low-income subsidies who do not make an active insurance plan choice when they qualify for Medicare are randomly assigned to a plan. The majority of beneficiaries fail to do so, making an understanding of this policy important for understanding the dual-eligible market. We combine administrative data from Medicare with an administrative measure of whether a beneficiary was enrolled through this process, which we can use as a measure of active decision-making. We augment this data with individually-linked longitudinal administrative Medicaid data that predates beneficiaries’ enrollment in Medicare. We use this rich data to measure the determinants of active choice behavior.

We find that the highest-risk beneficiaries make active choices at only slightly higher rates than the lowest-risk beneficiaries, suggesting that the dearth of active choice is not as 'rational’ as is assumed in typical models of active decision-making. We further investigate the persistence of “inactive choice,” including how it responds to health shocks, as well as other market and personal determinants. Our results highlight the difficulty beneficiaries have in navigating complex health insurance markets, and show that the downsides of providing social insurance through privatized market systems may be worse than existing theory would suggest.