College of Liberal Arts

Swimming through Complicated Waters, Medicare Part D Participants Learn to Reduce Spending Over Time, Economist Finds

Tue, Nov 1, 2011

AUSTIN, Texas — Despite substantial controversy among academics and policymakers about individuals' ability to choose complicated drug insurance products, economics research from The University of Texas at Austin has provided evidence that Medicare Part D participants quickly adapt and learn to reduce rates of overspending within the system.

"It should be very reassuring for economists and policymakers that elders can successfully navigate complex formularies and for the most part choose the least expensive among 50 options," says Eugenio Miravete, associate professor in the Department of Economics at The University of Texas at Austin. "Provided these findings hold in other environments, setting up excessive regulation and agencies to protect us from our own decisions may prove to be not only very expensive but also harmful."

Under Medicare Part D, a federal program built to create a market for prescription drug insurance among the Medicare population, senior citizens choose prescription drug insurance offered by numerous private insurers. Critics of the program worried that the sheer number of choices would cause widespread consumer confusion, which would lead to persistent, poor matches between consumer and product.

Miravete and his co-authors, however, found that these concerns were based on data from the program's first year of operation alone and neglected to consider how consumers' actions changed over time as they learned to operate within the new system.

"When the program was first implemented, there were plenty of complaints," Miravete says. "High-profile economists wrote about the poor design of the program; the president of the United States was routinely questioned about the painful process elders had to go through. One year later all that buzz has disappeared, and survey after survey shows that the elderly population increasingly likes the new program."

Miravete and his co-authors analyzed a data set of 71,399 individuals who were enrolled in stand-alone Prescription Drug Plans (PDPs) provided or administered by CVS Caremark for all of 2006 and 2007 and who did not receive a federal low-income subsidy in either year.

The researchers found strong evidence of a fast learning curve for Part D enrollees: From 2006 to 2007, 81 percent of the study sample lowered their overspending by an average of $298 — 55 percent of the 2006 level.

The researchers also found that the oldest consumers and those initiating medications for Alzheimer's disease improved by more than average, suggesting that family members and other people provide help in choosing plans. Prior research had overlooked these potential support systems.

"Having a multitude of options to choose from is economically efficient because we are all different and have different needs," Miravete says. "Restricting choices reduces the ability of firms to target individuals with specific needs, and it is not efficient that we all insure against unlikely risks. Medicare Part D is a successful implementation of a market-based approach to deliver a large-scale entitlement program."

The findings are forthcoming in the American Economic Review. Miravete's co-authors are Jonathan Ketcham from the W.P. Carey School of Business at Arizona State University, Claudio Lucarelli from Cornell University and M. Christopher Roebuck from the University of Maryland.

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