Determinants of Medicare plan choices: are beneficiaries more influenced by premiums or benefits?

To evaluate the sensitivity of Medicare beneficiaries to premiums and benefits when selecting healthcare plans after the introduction of Part D.

We matched respondents in the 2008 Medicare Current Beneficiary Survey to the Medicare Advantage (MA) plans available to them using the Bid Pricing Tool and previously unavailable data on beneficiaries' plan choices.

We estimated a 2-stage nested logit model of Medicare plan choice decision making, including the decision to choose traditional fee-for-service (FFS) Medicare or an MA plan, and for those choosing MA, which specific plan they chose.

Beneficiaries living in areas with higher average monthly rebates available from MA plans were more likely to choose MA rather than FFS. When choosing MA plans, beneficiaries are roughly 2 to 3 times more responsive to dollars spent to reduce cost sharing than reductions in their premium. We calculated an elasticity of plan choice with respect to the monthly MA premium of -0.20. Beneficiaries with lower incomes are more sensitive to plan premiums and cost sharing than higher-income beneficiaries.

MA plans appear to have a limited incentive to aggressively price their products, and seem to compete primarily over reduced beneficiary cost sharing. Given the limitations of the current plan choice environment, policies designed to encourage the selection of lower-cost plans may require increasing premium differences between plans and providing the tools to enable beneficiaries to easily assess those differences.