Open enrollment is approaching for Affordable Care Act marketplace plans (Nov. 1), Medicare Advantage (Oct. 15), Medicare Part D plans (also Oct. 15), and for many employer-sponsored plans (dates vary by employer, but mine is Nov. 10). Apart from cases in which employers only offer one plan, in all these markets consumers have several to dozens of plan options. Are people good at choosing among them?

Nope. That's a consistent finding across a large and growing body of research. In this post, I'll go over some of that work as it pertains to Medicare Part D and Medicare Advantage. In several, subsequent posts I'll cover work related to commercial market plans and the population they serve.

Several studies have documented that Medicare beneficiaries do not select the best Part D plans. Jason Abaluck and Jonathan Gruber found that 88% of consumers chose a more costly plan then they could have in 2006, the first year of the program, costing themselves an additional 30%, on average. In subsequent work, they found that the suboptimality of choices by beneficiaries was persistent over time.

With data from 2007 and 2008, Florian Heiss and colleagues found that more than 90% of Part D enrollees paid more than necessary, costing themselves and additional $300 per year, on average. These findings were largely corroborated by Jonathan Ketcham and colleagues, who also found that after one year of experience with the program, most beneficiaries reduced their overspending by making wiser choices. Chao Zhou and Yuting Zhang found that only about 5% of beneficiaries chose the least expensive plan available in 2009, and seniors overspent by an average of $368 in that year.

Many other studies have found that only a small minority of Part D enrollees choose the lowest cost option, costing themselves upwards of $500 per year.

Researcher by Kate Ho, Joseph Hogan, and Fiona Scott Morton found a second way in which failing to search for or find the lowest cost plan harms beneficiaries. Their analysis of the New Jersey Part D market found that insurers exploit consumers' complacency or inattention and raise premiums. This premium-increasing effect cost the average consumer $536 over 2007-2009, a 14.8% increase, and the federal government $550 million over the 3 years in additional subsidy spending.

For beneficiaries who do not switch plans, premium increases dominate the cost of poor choices. Most (70%) of the overspending by beneficiaries who did not switch plans, relative to that of the ones that did so, is due to increases in premiums in the plans in which they remain. So, complacent or inattentive beneficiaries lose twice: once when they choose a more costly plan, relative to other options, and even more when that plan (and plans in general) exploit beneficiaries' tendency to stick with their choices and raise premiums.

Two papers by Keith Ericson also argue that insurers strategically enter markets with low prices and increase them over time, exploiting consumers' inertia. That inertia is not necessarily entirely irrational, as comparing plans and switching imposes a cost in effort and time. One policy objective might be to reduce that cost (more below).

This "invest then harvest" pricing strategy that exploits consumers' status quo bias has been observed in other markets, including those for Medicare Advantage, commercial health insurance and others.

In the Medicare Advantage market, Michael McWilliams and colleagues observed that the probability of enrolling in a plan declines as the number of choices exceeds 30. A plausible explanation is that the choice becomes too complex and beneficiaries fall-back to the default of traditional Medicare. Corroborating this hypothesis, the authors found that enrollment by beneficiaries with high cognitive function is more responsive to out-of-pocket costs, relative to that of those with low cognitive function, suggesting that the latter are less able to appreciate or recognize the value of benefits. Prior work also showed that beneficiaries were challenged by the range of choices available through Medicare Advantage's predecessor programs, as well as Part D.

Providing assistance with the cognitive burdens of comparing plans may overcome the cost of searching, helping Medicare beneficiaries make wiser choices.

That's what Jeffrey Kling and colleagues found when, during the 2006 open enrollment period, they sent a random sample of beneficiaries from the University of Wisconsin Hospital system letters that compared Part D plan costs based on recipients' actual prescription drug use. Plan switching was 11 percentage points higher among beneficiaries who received the comparisons, relative to those who didn't (17% vs. 28%), saving letter recipients about $100 per year (5%), relative to non-recipients.

Such plan comparisons are available to all beneficiaries on the Medicare website or via a toll-free number, and all beneficiaries receive notice of that fact. This study shows that one cannot presume consumers take advantage of information just because it is public, a finding documented in many other contexts. Making it more accessible made a difference in Part D plan choices, just as doing so has done for school choices made by low-income families. Considering deficiencies in beneficiaries' understanding of Part D at that time, this is not surprising. The study found that only 37% knew that not all plans had a deductible; only 55% knew that brand and generic drug copayments varied by plan; and over 70% underestimated how much they could save by switching plans.

Another study, by Rajul Patel and colleagues, examined data drawn from 59 outreach events at which trained pharmacy students assisted over 2,000 California Medicare beneficiaries to select drug plans for years 2008 to 2013. Using Medicare's online tool, assisted beneficiaries were presented with plan options and costs based on their actual drug use. About 80% of assisted beneficiaries were not in the lowest-cost plan, consistent with other work. But over 60% switched plans after being assisted.

Consumers are objectively not good at selecting among a large number of Medicare Advantage or Part D plans. Providing easier access to cost-comparison information has been shown to improve decision making. As stylized facts, these two points are generalizable to other insurance markets, as I will document in subsequent posts.

Austin B. Frakt, PhD, is a health economist with the Department of Veterans Affairs and an associate professor at Boston University’s School of Medicine and School of Public Health. He blogs about health economics and policy at The Incidental Economist and tweets at @afrakt. The views expressed in this post are that of the author and do not necessarily reflect the position of the Department of Veterans Affairs or Boston University.

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