The PJ Tatler

Gruber: Seniors Should Be Limited to Three Lowest Cost Medicare Part D Plans

Jonathan Gruber

In a 2009 paper, “Choice Inconsistencies Among the Elderly: Evidence from Plan Choice in the Medicare Part D Program,” Obamacare advisor Jonathan Gruber argued that there were too many Medicare Part D plans for seniors to choose from, which led them to make bad decisions when enrolling in a plan.

In the paper, written for the National Bureau of Economic Research, Gruber wrote with Jason T. Abaluck that the privatization of the public Medicare program had resulted in dozens of private insurers offering a wide variety of insurance products for seniors to choose from. The result of so many choices, Gruber wrote, is that seniors are not making decisions that are in their best interest. “First, elders place much more weight on plan premiums than they do on the expected out of pocket costs that they will incur under the plan. Second, they substantially under-value variance reducing aspects of alternative plans. Finally, consumers appear to value plan financial characteristics far beyond any impacts on their own financial expenses or risk.”

The paper noted that while standard economic theory would suggest that expanded choice is a beneficial plan feature, “There are reasons to believe that the standard model is insufficient, particularly for a population of elders. There is growing interest in behavioral economics in models where agents are better off with a more restricted choice set.”

One of the reasons that choices should be restricted for seniors is their inability to understand the choices available to them. According to Gruber, “These issues may be paramount within the context of the elderly, given that the potential for cognitive failures rises at older ages.” He continued, “There is substantial scope for increases in utility if consumers made better choices, and some of these gains could be realized by restricting to the three lowest cost plans.”

Gruber admits that his models did not distinguish between the case of rational consumers choosing plans they trust and consumers making poor choices due to a lack of cognitive ability. “In either case,” he concluded, “our estimates imply that consumers would be better off if there were less scope for choosing the wrong plan.” 

Gruber reiterated his assertion that seniors would be better off with fewer choices in a follow-up paper in 2013, “Evolving Choice Inconsistencies in Choice of Prescription Drug Insurance.”

“The bold experiment with consumer choice across health insurance plans embodied in the Medicare Part D program provides an excellent opportunity to assess how consumers perform in choosing insurance plans,” Gruber wrote. “We find that, using the best available data, consumers are very inconsistent in their choices, overweighting premiums relative to out of pocket costs, weighting plan characteristics above and beyond the effect on that consumer, and ignoring variance in coverage across plans.”

Gruber again acknowledged that standard economic theory would suggest that Medicare beneficiaries are better off choosing from a wide variety of plans that meet their needs, rather than constraining them to a limited set of choices being made by the government. But perhaps giving insight into what Obamacare masterminds envision, not only for the Medicare Part D program but also for the future of the Obamacare exchanges, Gruber concluded, “There are a large number of behavioral economics models which suggest that in fact agents may be better off with more restrictive choice sets.”