Impact of Medicare Plan "Loyalty" on the Competitiveness of the Medicare Advantage Market

Background

We analyze whether Medicare beneficiaries are sufficiently responsive to changes in health plan premiums and benefits for “premium support” style Medicare reforms to be a viable strategy to control Medicare spending. The core belief behind premium support models is that Medicare beneficiaries, if faced with an array of health plan choices, will select the plans that provide the best combination of premium fees and benefit design.  This approach, also referred to as “competitive bidding”, is in turn based on two central beliefs:  1) health plans can reduce spending and 2) health plans will have an incentive to pass the savings on consumers in a competitive market.  Although these beliefs were borne out in Part D, it is difficult to extrapolate from Part D to a broader premium support program, partly because beneficiaries would face substantially higher “switching costs” in changing health plans versus changing drug plans.  Beneficiaries often have attachments to particular providers, for example, and would be hesitant to change plans if that required changing providers.  If switching costs are sufficiently large, then the second central belief will be untrue – plans will not have an incentive to pass on saving because plan enrollees will effectively become a captive market.  The paper estimates the magnitude switching costs in Medicare Part C. 

 Data and Methods

The project draws data from the Medicare Current Beneficiary Survey, a representative longitudinal dataset.  Six years of MCBS data (2006-2011) were combined with data on Medicare Advantage Part C plan benefits and premiums.  Individual choices are modeled as a function of individual characteristics, plan characteristics and prior year plan choices.  Analytically, we will estimate the magnitude of switching costs using a mixed logit model, observing plan choices over time.  We explicitly model the impact of plan “loyalty” on plan choices, and allow “loyalty” to be a random coefficient.  The random coefficient allows us to identify not only the mean value of loyalty, but also to identify factors which predict loyalty.

 Results

Relatively low rates of switching between plans were observed, suggesting that prior year plan choices are a significant factor in plan selection.  Preliminary results indicate that play loyalty is a function of individual characteristics, suggesting that there may be significant transactions costs associated with switching plans. 

 Conclusions

The presence of significant transaction costs in switching plans may impede the ability of markets to function effectively in a premium support Medicare reform.