Evolving Choice Inconsistencies in Choice of Prescription Drug Insurance

Abstract

We study choice over prescription insurance plans by the elderly using government administrative data to evaluate how these choices evolve over time. We find large "foregone savings" from not choosing the lowest cost plan that has grown over time. We develop a structural framework to decompose the changes in "foregone welfare" from inconsistent choices into choice set changes and choice function changes from a fixed choice set. We find that foregone welfare increases over time due primarily to changes in plan characteristics such as premiums and out-of-pocket costs; we estimate little learning at either the individual or cohort level.

FIGURE 1

PERFECT FORESIGHT FOREGONE SAVINGS

FIGURE 2

RATIONAL EXPECTATIONS PREDICTED FOREGONE SAVINGS Notes: Figure 1 shows the distribution of foregone savings per year in the Full Sample using our perfect foresight measure while Figure 2 gives the distribution using our predicted costs measure. The x-axis gives dollars of foregone savings, the y-axis the fraction of the total population in that bin.

FIGURE 3

CALIFORNIA CHOICE SET, 2006 Notes: CA Choice Set in 2006. Each point represents a single plan. Average total costs are the average of perfect foresight total costs (premiums plus realized out of pocket costs).