Comparison Friction: Experimental Evidence from Medicare Drug Plans

Abstract

Consumers need information to compare alternatives for markets to function efficiently. Recognizing this, public policies often pair competition with easy access to comparative information. The implicit assumption is that comparison friction—the wedge between the availability of comparative information and consumers’ use of it—is inconsequential because information is readily available and consumers will access this information and make effective choices. We examine the extent of comparison friction in the market for Medicare Part D prescription drug plans in the United States. In a randomized field experiment, an intervention group received a letter with personalized cost information. That information was readily available for free and widely advertised. However, this additional step—providing the information rather than having consumers actively access it—had an impact. Plan switching was 28 percent in the intervention group, versus 17 percent in the comparison group, and the intervention caused an average decline in predicted consumer cost of about $100 per year among letter recipients—roughly 5 percent of the cost in the comparison group. Our results suggest that comparison friction can be large even when the cost of acquiring information is small, and may be relevant for a wide range of public policies that incorporate consumer choice.

Use Of Intelligent Assignment To Medicare Part D Plans For People With Schizophrenia Could Produce Substantial Savings

“…This finding may generalize to non-schizophrenic patients, since the general Medicare beneficiary’s voluntarily chosen plan is frequently not optimal. 2–4, 9, 12, 13 …”

Applying Insights from Behavioral Economics to Policy Design

“…When the optimality of a specific option depends on individual attributes of a given consumer, providing personalized information specific to the choice context can improve decision outcomes. For example, Kling et al (2012) find that providing seniors with individualized information on lower-cost Medicare Part D prescription drug plans induces greater switching to a lower-cost plan (an 11–percentage point increase) than providing generic information about the opportunity to switch drug plans (and results in lower expected costs to consumers as well).The presentation of attributes in a way that facilitates informed consumer decision making. Larrick & Soll (2008) show that consumers make more accurate decisions about automobile fuel savings when fuel efficiency is expressed as gallons per 100 miles than with the more traditional miles per gallon measure (the so-called MPG illusion).…”

“…When the optimality of a specific option depends on individual attributes of a given consumer, providing personalized information specific to the choice context can improve decision outcomes. For example, Kling et al (2012) find that providing seniors with individualized information on lower-cost Medicare Part D prescription drug plans induces greater switching to a lower-cost plan (an 11–percentage point increase) than providing generic information about the opportunity to switch drug plans (and results in lower expected costs to consumers as well).…”

Private Provision of Social Insurance: Drug-Specific Price Elasticities and Cost Sharing in Medicare Part D

“…Cutler and Zeckhauser 2000; Einav et al 2013; Aron-Dine et al 2015), and the empirical literature on Medicare Part D (e.g. Abaluck and Gruber 2011, 2016; Ketcham and Simon 2008; Ketcham et al 2012, 2015; Kling et al 2012; Abaluck, Gruber, and Swanson 2015; Dalton, Gowrisankaran, and Town 2015; Decarolis 2015; Decarolis, Polyakova, and Ryan 2015; Polyakova 2016). Finally, our estimation of drug-specific elasticities contributes to the empirical literature that has estimated the price responsiveness of demand for specific drugs (e.g.…”

“…For welfare analysis of choice in privately-provided, publicly-designed health insurance systems, see for example Abaluck and Gruber (2011, 2016), Ketcham et al (2012, 2015), or Kling et al (2012). …”