Plan Selection in Medicare Part D: Evidence from administrative Data

We study the Medicare Part D prescription drug insurance program as
a bellwether for designs of private, non-mandatory health insurance
markets, focusing on the ability of consumers to evaluate and
optimize their choices of plans. Our analysis of administrative
data on medical claims in Medicare Part D suggests that less than
10 percent of individuals enroll in plans that are ex post optimal
with respect to total cost (premiums and co-payments). Relative to
the benchmark of a static decision rule, similar to the Plan Finder
provided by the Medicare administration, that conditions next
year’s plan choice only on the drugs consumed in the current year,
enrollees lost on average about $300 per year. These numbers are
hard to reconcile with decision costs alone; it appears that unless
a sizeable fraction of consumers value plan features other than
cost, they are not optimizing effectively.