Cutting Through the Clutter: Making Insurance Choices Easier in the United States
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?
Context of the evaluation
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.
There are several reasons to believe that substantial comparison friction occurs in the choosing of Medicare Part D plans. A recent study found that more than 70 percent of seniors believed that there were too many alternative plans to choose from, and more than half had difficulty understanding how Medicare Part D worked and what savings to expect.
Details of the intervention
This study estimates the impact of reducing comparison friction on consumer choice in the market for prescription drug insurance plans for senior citizens.
The sample, which was drawn from patients of the University of Wisconsin Hospital, was randomly assigned to either a treatment or a comparison group. Seniors in the treatment group received a letter with personalized price information created by entering their prescription use data into Medicare's Plan Finder website. They saw the cost of all plans for their personal drug profile, as well as how much they would save by switching to the lowest-cost plan. The comparison group was given only the address of this website, but they had to actively pursue this information, whereas the treatment group had information delivered to them.
The experiment included a baseline phone survey, and two follow-up phone surveys, one in early 2007 and one in early 2008.
Results and policy lessons
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.
Providing personalized information to consumers, rather than having them actively access it, had a significant impact on their ultimate choices. Twenty-eight percent of those in the treatment group switched plans between 2006 and 2007, compared to 17 percent in the comparison group. This brought about a decline in the average consumer cost of around US$100 per year for letter recipients. These results suggest that comparison friction can be large even when the cost of acquiring information is small, and may be relevant for a wide range of public policies that incorporate consumer choice.
Kling, Jeffrey R., Sendhil Mullainathan, Eldar shafir, Lee C. Vermeulen, and Marian V. Wrobel. 2012. "Comparison Friction: Experimental Evidence from Medicare Drug Plans." The Quarterly Journal of Economics 127:199-235.