Cutting Through the Clutter: Making Insurance Choices Easier in the United StatesPDF version
Government services increasingly rely on consumer choice. For example, Medicare Part D prescription drug insurance requires consumers to choose a plan from a menu of options. The rationale for providing choices is straightforward – individuals have varying preferences and choice allows them to opt for services that best match those preferences. However, being able to look at a menu of options and pick the one that most effectively matches their needs requires informed consumers. As a result, public policy is often designed to make comparative information readily available. Simply making such information available, however, does not ensure consumers will use it. Can a program to reduce comparison friction – the wedge between the availability of comparative information and consumers’ use of it – help consumers to make better decisions?
The Medicare Part D prescription drug benefit was established as part of the United States’ Medicare Modernization Act of 2003, with coverage beginning in January 2006. Under the benefit structure, individuals are typically able to choose from among 40-60 plans, depending upon where they live. The cost of each plan includes a monthly premium common to all beneficiaries of that plan and a personalized component that depends upon use. Under a standard plan in 2007, individuals paid 100 percent of the first US$265 of total costs of covered medications, 25 percent of total costs US$266-US$2400, and 100 percent of total costs US$2401-$5401. Most insurers offer two or three plans, including one actuarially equivalent to the standard plan and one or two with higher premiums and more cost sharing.
This study estimates the impact of reducing comparison friction on consumer choice in the market for prescription drug insurance plans for senior citizens.
At baseline, the leading sources of information that participants used to learn about drug plans were mailings from insurance plans and mailings from Medicare. However, those mailings were not personalized and did not clearly convey information about actual out-of-pocket costs. More personalized information was accessible at quite a low cost (for example, by calling 1-800-Medicare or your local pharmacy), but only 18 percent of individuals nationally had ever reviewed personalized plan comparisons.
