Part D, the federal government’s prescription drug benefit 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, including many who face cognitive challenges. 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 at 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 overcome the challenges of the marketplace? “As economics researcher, I’m interested in why people do what they do—and whether or not consumers can make sound choices,” Ketcham says. “It’s one of the deep questions in marketing, economics, psychology and public policy. And the big underlying question in Part D goes right to this consumer issue. Can consumers make sound decisions, or would greater government restrictions make people better off?” Though numerous studies have been conducted over the years to figure out just how confusing Part D is, Ketcham said that this remains an open, ongoing research question. In a paper called Sinking, Swimming, or Learning to Swim in Medicare Part D,” published recently on the website of the American Economic Review, Ketcham and his research partners show that consumers have succeeded in reducing their out of pocket expenditures under Part D, suggesting that some long-standing beliefs about the ability of customers to sort through complexities may need to be reconsidered. Making the right choice Working in conjunction with researchers at Cornell University, the University of Maryland and the University of Texas, Ketcham dove into a massive dataset from collected from the Centers for Medicare and Medicaid Services (CMS), CVS Caremark (one of the pharmacy benefit managers for the program) 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 this data, and the first to get a full analysis of multiple years’ worth of data done,” he said. “Some people had looked at just the first year. Some people had taken some other approach. But it’s certainly a big question, and one that a lot of researchers are interested in asking.” The goal, Ketcham said, was fairly simple: To determine if, over a two-year period, patients who may have spent too much for their PDP in 2006 would adjust and make different choices in 2007 and eliminate wasteful spending. “We wanted to look at the choices involved,” he said. “Some will say that, when you create new markets, mistakes are going to be made by consumers. And in Medicare Part D, people are especially worried about that, given the high number of patients involved in the plan who have cognitive disabilities. There were a lot of concerns whether or not these individuals could actually make these choices. But economic models don’t make any claims that people will make the right choice. The important thing is whether or not they respond [to those initial choices.]” In the case of Medicare Part D, consumers did respond, and they adjusted their coverageIn so doing, they not only saved themselves money, but also proved that consumers—and even those who are elderly, or mentally disabled—can face up to the challenges of a new marketplace. Learning to swim According to the team’s results, overspending on PDPs fell sharply. On average, consumers saw their out-of-pocket costs drop by $300 in the first year, and a full 81 percent were able to find cheaper coverage in Year 2 than they had in Year 1. Additionally, even the most elderly and mentally challenged of the Part D population realized significant savings when compared to the broader population. The study found that consumers with cognitive challenges ”improved by the most [among all those studied], 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.” This improvement, Ketcham says, suggests that these individuals were being assisted in their health care planning by others—sons or daughters, nieces or nephews, friends or neighbors. “I think some researchers will consider this finding is especially surprising,” he said. “But that’s because this kind of analysisyypically is conducted in a lab setting. Subjects are not going to be able to calculate compounding interest on the spot without an adviser or a calculator—things that even you and I would use. But that’s an important angle to consider, especially for policy makers.” 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, then, Ketcham argues that the findings support the argument that consumers are capable of making smart decisions, even in a challenging marketplace. 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 consumers are inert, and that this inertia allows [the market] to take advantage of them,” he says. “We don’t want to close the debate by any means, but as a researcher I would like to see more data across more years, to see what happens as competition continues. But for now, our study is one data point against the conventional wisdom that people are so easily confused. We’re hoping it will provoke some thought.”
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Tags: Benefit, Prescription Benefit