Switching Costs in Medicare Advantage.

Area of Science:

• Health Economics
• Behavioral Economics
• Public Policy

Background:

• Consumers are assumed to choose Medicare Advantage plans maximizing utility.
• Previous plan choices are often omitted in choice models.
• Understanding switching costs is crucial for market competition and consumer welfare.

Purpose of the Study:

• To estimate the magnitude of switching costs in the Medicare Advantage program.
• To analyze the impact of prior choices on current Medicare Advantage plan selection.
• To quantify the willingness to pay for specific plan benefits.

Main Methods:

• Utilized five years of the Medicare Current Beneficiary Survey (MCBS) data.
• Combined MCBS data with Medicare Advantage Part C plan benefits and premiums.
• Employed a mixed logit model to analyze individual choices based on demographics, plan characteristics, and prior choices.

Main Results:

• Found significant switching costs, particularly between different insurers.
• Prior year plan choices were highly significant predictors of current choices.
• Identified a willingness to pay for lower deductibles and copays, with higher costs for sicker individuals.

Conclusions:

• Switching costs are substantial, especially when changing insurers ($944 vs. $233 within-insurer).
• Prior choices demonstrate structural state dependence, impacting market dynamics.
• Ignoring past choices overestimates premium elasticities by 34%.