Behavioral economics and consumer choice: An econometric and experimental analysis of health plan choice in the Medicare program

Choice is an important aspect of the US health care system and is increasingly being looked to as a means for reform. This is particularly true of the Medicare program. Most Medicare beneficiaries have dozens of health plans from which to choose as an alternative to traditional Medicare.; The theory supporting such choice is that of neoclassical economics. A greater number of diverse plan options should lead to a better match between a health plan and a consumer's preferences for such a plan. As such, consumers should be more likely to enroll in a plan (as an alternative to traditional Medicare) and switch plan when dissatisfied. However, the findings of behavioral economics or bounded rationality call into question the ability of the consumer to sort through and choose a plan in the face of an increased menu of plan options.; Those who study behavioral economics seek to come up with more realistic, psychologically plausible models of consumer behavior. As such, there is a recognition that consumer do not have an unlimited cognitive processing capability. Therefore, when given more plan options consumers might respond not by finding a plan that well matches their preferences, but by not choosing a plan at all (choice deferral).; This dissertation seeks to understand how consumers respond to choice using a variety of empirical methods. Paper #1 uses an econometric analysis of secondary data to find that after a reasonable amount of plan choice (3-4 plans) Medicare beneficiaries are no more likely to enroll in or switch plans and are quite often less likely to do so. Those that do enroll are not more satisfied when given more options. These results do not appear to be driven solely by search costs.; Papers #2 and #3 report on a set of original hypothetical choice experiments utilizing a nationally representative internet panel. These papers corroborate the findings from the econometric analysis. In addition, beneficiaries appear to be deferring choice as a result of preferences uncertainty (being uncertain as to whether key tradeoffs of "worth it") at the lower end of the choice set and cognitive overload (simply being cognitively overwhelmed) at the higher end. Finally, consumers are making key violations of expected utility theory in making their choices (being influenced by ordering and the introduction of dominated options)---these violations are not limited to those with larger choice sets.; As a whole, this set of papers calls into question the wisdom of providing Medicare beneficiaries more options to induce them to enroll in a plan or to increase their satisfaction. In fact, these consumers are violating basic choice principles. Moreover, these studies point to the value that health economics and health policy can draw from behavioral economics. This value is likely to increase as consumer-based approaches to health policy increase in the United States and abroad.