Medicare , prescription drugs , insurance demand , health production , dynamic discrete choice
Abstract:
Medicare Part D provides prescription drug coverage through Medicare approved plans offered by private insurance companies and HMOs. In this paper, we study the role of current prescription drug use and health risks, related expectations, and subjective factors in the demand for prescription drug insurance. To characterize rational behavior in the cmplex Part D environment, we develop an intertemporal optimization model of enrollment decisions. We generally find that senior's choices respond to the incentives provided by their own health status and the market environment as predicted by the optimization model. The proportion on individuals who do not attain the optimal choice is small, but the margin for errors is also small since enrollment is transparently optimal for most eligible seniors. Further, there is also evidence that seniors over-react to some salient features of the choice situation, do not take full account of the future benefit and cost consequences of their decicsions, or the expected net benefits and risk properties of alternative plans.
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