Switching Costs in Medicare Advantage

This paper estimates the magnitude of switching costs in the Medicare Advantage program. Consumers are generally assumed to pick plans that provide the combination of benefits and premiums that maximize their individual utility. However, the plan choice literature has generally omitted prior choices from choice models. The analysis is based on five years of the Medicare Current Beneficiary Survey, a nationally representative longitudinal dataset. The MCBS data were combined with data on Medicare Advantage Part C plan benefits and premiums. Individual choices are modeled as a function of individual characteristics, plan characteristics and prior year plan choices using a mixed logit model. We found relatively high rates of switching between plans within insurer (20%), although less switching between insurers. Prior year plan choices were highly significant at both the contract and plan level. Premium was negative and significant. Loyalty (contract and plan), premium and plan structure were found to be heterogeneous in preferences. We found a statistically significant willingness to pay for a lower prescription drug deductible and lower copays. Switching costs were higher for sicker individuals. Switching costs between plans offered by the same insurer are far lower than switching costs between insurers; beneficiaries will switch plans if an alternative is perceived as $233 a month better than the current choice and switch insurers if the alternative is perceived as $944 better than the current plan/contract, on average. Premium elasticities would be 34% greater in magnitude if prior choices were irrelevant. We provide evidence that the state dependence is structural rather than spurious.