How Much Choice? Nonlinear Relationships between the Number of Health Plan Options and the Choices of Medicare Beneficiaries
- Presenter:
Chair: Ted Frech; Discussant: Roger Feldman Mon June 5, 2006 15:30-17:00 Room 226
Background: Expanding the choices available to Medicare beneficiaries is a central aspect of recent Medicare reform. Economic theory predicts that as the number of health plan options available increases, beneficiaries will be more likely to find a plan that matches their preferences. Improved matching should lead to a) an increase in the take-up of Medicare Advantage (formerly, Medicare+Choice) plans as an alternative to fee-for-service Medicare, and b) an increase in the probability that individuals in poorly performing plans will exit when dissatisfied.
However, research on bounded rationality indicates that these assumptions might be wrong. This literature demonstrates that large numbers of options can be associated with choice deferral—foregoing options that would have been chosen if presented in a smaller choice set. However, most of this work (with one exception) has examined only low-cost, everyday goods. Whether the same is true for health plans is not clear.
Objective: To determine how the health plan enrollment and disenrollment decisions of Medicare beneficiaries are influenced by the size of the beneficiary’s choice set.
Data: We examine data from a separate survey of Medicare beneficiaries fielded in 2000.
Methods: We examine both the probability of enrollment into a Medicare health plan (when beneficiaries first become eligible for Medicare) and the probability of switching health plans. We also examine two additional outcomes to confirm our interpretation of the number of plans variable: Did those who did not enroll consider doing so, and How long did the beneficiary take considering their options. The key independent variable is the number of Medicare Advantage plans available in their county of residence. We control for other individual and market characteristics known to be related to enrollment and disenrollment and allow for a non-linear relationship between choice set size and our dependent variables.
Results: We find that increasing the size of the choice set from 1-2 to 3-4 options does seem to both increase the probability of enrollment in a Medicare Health Plan, as well as switching plans. However, after 3-4 plan options, there is no subsequent increase in either enrollment or disenrollment, and some evidence of a decrease in both. These results seem robust across various model specifications and sub-samples.
Conclusions: While some choice is beneficial in inducing health plan enrollment and switching, the relationship between number of options and enrollment and switching is non-linear. As health policy moves towards increasing the number of choices that consumes are asked to make, the behavioral economics and bounded rationality literature could have important contributions.
