Medicare Part D covers prescription drugs for largely elderly Americans in the U.S. Those who qualify for both Medicare and Medicaid receive Part D drug coverage with no premiums and reduced copayments through the low-income subsidy program (LIS). Although federal and state government pays for about 6 out of every 7 dollars of the Part D program, private Part D drug plans actually administer these benefits. Beneficiaries who are enrolled in Medicare Part D get to choose across these plans. Although the federal government sets minimum coverage requirements, Part D plans get to determine which drugs to cover on their formulary, cost-sharing levels for each drug, and additional non-price rationing mechanisms (e.g., prior authorization).
A key question to answer is how well Medicare Part D beneficiaries do at choosing their plan. According to an NBER working paper by Brot-Goldberg et al. (2021), the answer is not very well. They use a number of natural experiments to answer this question. The first natural experiment is that LIS beneficiaries receive a default Part D plan assigned to them upon a few months before enrollment. If the beneficiary does not opt out of this default before enrollment, they will be enrolled in the default. Using data on default assignment and final choice of plan, the authors find that:
….only 16% of new LIS beneficiaries opt out of their randomly-selected default plan and actively choose a different plan during initial enrollment…Of those who were enrolled in their default assignment, nearly two-thirds did not make an active choice to opt out of their default after five years, a striking degree of choice passivity.
In addition to examining default choices at enrollment, the authors also look at defaults over time. In a second source of natural variation, the authors note that Part D plans will place a premium bid to CMS above the maximum LIS subsidy level; for individuals in these plans, they will be randomly assigned to another default plan so they will not owe a penalty. While this mechanism causes many people to switch plans, the random reassignment default–rather than active choice–is the principal mechanism by which changing plans occurs. Specifically:
Roughly 99% of those who do not initially opt out of the default of reassignment remain in their new plan for at least two years post-reassignment. Most beneficiaries do not appear to be willing to pay as little as $2per month to remain in their incumbent plans.
Does any of this matter? It turns out that the lack of shopping around does make a difference.
…no matter what default plan the beneficiary is assigned, the share of beneficiaries making an active choice is fewer than 10 percent. This is true despite our finding that beneficiaries assigned to the low-value plans experience a loss of drug consumption three times the size of the loss experienced by the beneficiaries assigned to the high-value plan
Note that there is individual heterogeneity. Some people are more wise shoppers and there is a person fixed effect at work. For instance, the authors find that when a beneficiary’s Part D plan exits, people who made an active plan choice in the past (i.e., chose a plan other than the default) made an active choice 25.6% of the time; whereas those who always choose the default only made an active choice to change plans 7.7% of the time.
In short, Part D beneficiaries are not good shoppers. Nevertheless, it does not mean that a purely paternalistic approach is needed. If at least some of the beneficiaries are active shoppers, that will instill some discipline into the market. Nevertheless, the study’s findings on the (lack of) active shopping behavior among Part D beneficiaries is revealing.
- Brot-Goldberg ZC, Layton T, Vabson B, Wang AY. The Behavioral Foundations of Default Effects: Theory and Evidence from Medicare Part D. National Bureau of Economic Research; 2021 Jan.