Medicare Part D: Just Say… ??

Medicare Part D:Just Say… ?? Presented by Shauna Curwin & Darryl Bandoro PADM 5111 – Microeconomics March 5, 2009

Prescription Drug Coverage PART D • Largest overhaul in Medicare’s history • Provide drug coverage via a half-trillion dollar federal subsidy • Liberal Paternalistic Plan?

How it Works • Main reason Part D was put in place was to aid seniors: give them a range of drug coverage options • Prescription drug coverage through Medicare approved plans are offered by private insurance companies and HMOs. • Voluntary plan for most. Exception applies to 6.2 million low-income seniors and disabled people. • Consumers under Medicare can opt out or enroll in a private plan. • If they do not opt-out, but fail to choose a plan, they are assigned one at random!

Choice Architecture The Problems – Market Failure • Too many options • Too much decision-making responsibility • Confusing • Poor default options • Result: Irrational Decision Making

The Study “Free Markets and Fettered Consumers” – by Daniel McFadden Retirement Perspectives Survey (RPS 2005) Focus on Medicare eligible population – aged 65+, N=1996 Survey asked questions on Part D, health status/conditions, long-term care choices, prescription drug use/cost, and attitudes toward risk. Part D as an economic policy experiment: can the benefits of competition overcome the problems of adverse selection and moral hazard that are present in private insurance markets and are consumers able to understand and evaluate different plans in their own self-interest? Medicare Part D Insurance Prescription Drug Market shows that it can be very unrealistic for a large number of uniformed individuals to rely on their own self-interest to make the best decision for themselves. Seniors have a hard time choosing the best plan for themselves because of its complexity and problems.

Findings • A huge proportion of the Medicare population (especially individuals with low SES, bad health, and poor cognitive ability) are not familiar enough with the Part D prescription drug program to make a good decision. These groups may not be in the best position to benefit from the program. TABLE 6—PERCENT WITH LITTLE OR NO KNOWLEDGE OF PART D • All 39.5 • High SES 32.5 • Bad health 49.8 • Low cognition 46.9 • Low SES, bad health, and low cognition 54.3

Findings • These numbers do not include individuals who have chosen not to enroll in a part D plan because they have drug coverage that is equal to or better than the Medicare Standard Plan. • The percentage differences are not very big, but they are statistically significant. TABLE 7—PERCENT NOT LIKELY TO ENROLL • All 17.0 • Good health 19.0 • Bad health 11.7 • Well informed 14.7 • Poorly informed 19.6

FIGURE 2. ENROLLMENT THRESHOLDS MINIMIZATION OF EPV OF OPC

Useful Nudges • CMS should start a marketing campaign that targets vulnerable individuals who are not informed enough to make decisions in their own self-interest. • Could accomplish this by giving insurers incentives to seek out vulnerable seniors as clients. • “Default in” instead of “Default out” • All seniors would be offered a plan unless they decided on another plan themselves, specified that they want to opt out, or wanted Medicare or an ombudsman to decide for them.

Links to ‘Nudge’ Making the Market more Efficient • Intelligent Assignment • Instead of Random plan assignment, nudge users towards the optimum plan • RECAP • Provide easily comparable information to nudge away the ‘status quo bias’

Thank you!

Medicare Part D: Just Say… ??