Can Medicare patients decipher prescription benefit?

Part D, the federal government’s prescription drug insurance program for Medicare enrollees, relies on competition between private insurers to create savings for consumers. This “managed competition” model offers consumers dozens of coverage options with the goal of enabling them to reduce unnecessary out of pocket expenses. Critics of the plan have argued that Part D is too complicated and confusing for its target audience of senior citizens, especially those with dementia. The issue created an opportunity for researcher Jonathan Ketcham, an associate professor in the marketing department of the W. P. Carey School of Business, to look at one of the deep questions in marketing, economics, psychology and public policy: can consumers make sound decisions, or would greater government restrictions make people better off?
 

Part D, the federal government’s prescription drug insurance program for Medicare enrollees, relies on competition between private insurers to create savings for consumers. This “managed competition” model offers consumers dozens of coverage options with the goal of enabling them to reduce unnecessary out of pocket expenses.

Critics of the plan have argued that Part D is too complicated and confusing for its target audience of senior citizens, especially those with dementia. Some have argued that the plan is so convoluted that even the insurers that participate in the plan don’t fully understand how it works. In fact, the New York Times reported in 2006 that 22 percent of calls made to Part D providers about the plan resulted in the delivery of inaccurate information.

Jonathan Ketcham, an associate professor in the marketing department of the W. P. Carey School of Business, saw the ongoing worries about Medicare Part D as a window into a wider debate about the wisdom of consumers. When faced with important economic decisions, can they make the "right" choice, financially speaking, and navigate through the diverse choices to find the one right for them?

"As a researcher, I'm interested in why people do what they do—and specifically how people decide which products and services to buy," Ketcham says. "Whether people can make choices that are best for themselves is one of the deep, controversial questions in marketing, economics, psychology and public policy. And this broad question is especially relevant to Part D: can elderly consumers make sound decisions about complicated insurance products, or would greater government restrictions make people better off?”

Several previous studies have highlighted ways in which Part D has succeeded, including total program costs far below projections, high participation rate and high consumer satisfaction. But the remaining controversy hinges on whether consumers are confused and make bad choices in ways that create profit opportunities for companies.

In a paper published recently online by The American Economic Review called “Sinking, Swimming, or Learning to Swim in Medicare Part D,”, Ketcham and his research partners show that consumers dramatically reduced the amount of money they left on the table between 2006 and 2007, the first and second years of the program. This contradicts widely-held beliefs that consumers in general can be taken advantage of because they are easily confused and stick with products that were not ideal for them.

Making the right choice

Working in conjunction with researchers at Cornell University, the University of Texas, and the University of Maryland Baltimore County, Ketcham dove into massive datasets from CVS Caremark (one of the private insurers selling and administering Part D plans), the Centers for Medicare and Medicaid Services (CMS) and several other sources. In total, the research team looked at 71,399 individuals who were enrolled in stand-alone Prescription Drug Plans (PDPs) in 2006 and 2007. Ninety-five PDPs were included in the 2006 data, and 154 in the 2007 data.

"We were the first researchers to get access to data showing how individuals’ actual choices and spending changed over time," he said. "Some researchers have previously conducted telephone surveys or analyzed data from only the first year. But those approaches don’t allow for the possibility that people learn. It’s a big question for Part D, for health care reform, and for research and policy on consumer choice more broadly.”

The goal, Ketcham said, was fairly simple: to determine if, over a two-year period, consumers who may have spent too much in 2006 would adjust and make different choices in 2007 -- eliminating wasteful spending.

"Even the `old-fashioned’ models of consumer decision making don’t assume that everyone makes the best choice in the first year of a brand new market. So as a researcher, I felt that we needed to look at changes over time rather than considering the matter settled from the first year alone." he said. “Some of the prior work, primarily from surveys and lab experiments, suggested that we are overwhelmed by too many choices as consumers, and these fears were especially high given the complexity of health insurance and the age of the Medicare population. But other previous work showed that in actual markets, consumers learned from past mistakes and quickly corrected them.”

In the case of Medicare Part D, consumers did respond, and they adjusted their coverage. In so doing, they not only saved themselves money, but also proved that consumers—even those with cognitive limitations—can face up to the challenges of choosing from many complex products.

Learning to swim

According to the team's results, overspending on PDPs fell sharply from the first to the second year. On average, consumers saw their out-of-pocket costs drop by $300 in the first year, with over 4 out of 5 people in the study sample achieving some improvement.

Additionally, even those with Alzheimer’s disease or other types of dementia achieved large gains. The study states that those initiating medications for Alzheimer's disease in 2007 improved by more than average, and those taking such medications in both years did not significantly differ from the average improvement. Further, the oldest populations improved the most. "These improvements,” Ketcham says, “suggest that these individuals were being assisted in their health care planning by others such as family, friends and health care providers.”

"I think some researchers will consider this finding especially surprising," he said. "Most of the prior work was conducted in a lab setting that prevented respondents from relying on support tools or the help of others. But most of us, regardless of our education or age, would have a hard time making hard decisions that require things like calculating compounding interest, in a lab without an adviser or a calculator—things that we would use when making real, important choices. But that's an important angle for policy makers and researchers to consider."

Finally, and perhaps most notably, Ketcham and his team found that those consumers who overspent the most in Year 1 of their PDP experience realized the greatest savings in Year 2. This suggests that consumers do know when they are being overcharged, do understand marketplace dynamics, and do know how to realize savings if need be.

"Plus, we found that people who saw that their plans were about to get worse were much more likely to switch out of those plans," he said. "They were looking both backward and forward—asking themselves if they could do better, and also wondering if their plan will get worse compared to the others."

Smart enough

In sum, Ketcham argues that the findings support the argument that consumers are capable of making smart decisions, even in health care, and even when faced with many, complex options. The work also challenges the common assumption that Medicare Part D itself is far too complicated, and far too confusing, for its vulnerable target audience.

"This is evidence against the conventional wisdom that consumer inertia allows private companies to take advantage of them," he says. "This is an ongoing debate that applies to a large number of contexts, and I don’t claim that this study has settled the issue. For Part D, I’d want to know how consumers even outside of the CVS Caremark plans fared, and what has happened since 2007. But I hope this work gives pause as policy makers consider how to reform Medicare, how to design the new state health insurance exchanges, and whether to further restrict the types of mortgages and credit cards that Americans can buy. These results suggest that consumers may not be gripped by confusion, even in a context where people expected it to be a big problem. So restricting choices may not be necessary and may even be harmful.”