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Salience, Myopia, and Complex Dynamic Incentives: Evidence from Medicare Part D

Author

Listed:
  • Christina M. Dalton
  • Gautam Gowrisankaran
  • Robert Town
Abstract
The standard Medicare Part D drug insurance contract is nonlinear—with reduced subsidies in a coverage gap—resulting in a dynamic purchase problem. We consider enrollees who arrived near the gap early in the year and show that they should expect to enter the gap with high probability, implying that, under a benchmark model with neoclassical preferences, the gap should impact them very little. We find that these enrollees have flat spending in a period before the doughnut hole and a large spending drop in the gap, providing evidence against the benchmark model. We structurally estimate behavioral dynamic drug purchase models and find that a price salience model where enrollees do not incorporate future prices into their decision making at all fits the data best. For a nationally representative sample, full price salience would decrease enrollee spending by 31%. Entirely eliminating the gap would increase insurer spending 27%, compared to 7% for generic-drug-only gap coverage.

Suggested Citation

  • Christina M. Dalton & Gautam Gowrisankaran & Robert Town, 2015. "Salience, Myopia, and Complex Dynamic Incentives: Evidence from Medicare Part D," NBER Working Papers 21104, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:21104
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L88 - Industrial Organization - - Industry Studies: Services - - - Government Policy

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