New Medicare research may have broader implications for health care reform

Associate Professor Jonathan Ketcham

Giving people more choices can eliminate wasteful spending, even in health care. New research from the W. P. Carey School of Business at Arizona State University shows that one government program has worked to cut the amount of money Americans were wasting out of pocket, despite intense speculation about how confusing the program would be.

The research on Medicare Part D reveals consumers can make good choices when faced with lots of private insurance options. This may have much broader implications for health care reform in general.

“Although many of the widely publicized opinions of the Medicare Part D program were initially pessimistic, the growing evidence is largely positive, with high participation, expanded prescription drug use, lower out-of-pocket prices for drugs, high consumer satisfaction and total program costs below projections,” says W. P. Carey School of Business associate professor Jonathan Ketcham, lead author of the study. “These new findings build on prior work that highlights the successes of Part D.”

Ketcham’s new research, with partners from Cornell University, the University of Texas at Austin and the University of Maryland, was just published online by the American Economic Review. In it, the researchers looked carefully at Part D, which allows Medicare beneficiaries to choose among competing private insurance plans for prescription drug coverage. The program is currently in its annual open-enrollment period.

The researchers used information from the Centers for Medicare and Medicaid Services and a sample of data on more than 70,000 people from CVS Caremark, which sells Part D plans and also administers plans sold by other companies. They found consumers were able to improve their choices and reduce overspending by an average of about $300 per person from the first year to the second year of the program, 2006 to 2007. That’s a drop of 45 percent.

“Eighty-one percent of those in the sample saved money, even with less than one year of experience in the program,” says Ketcham. “The primary insight here is that consumers can navigate through health care markets even when faced with a lot of complex, diverse choices.”

The research shows the greatest improvements were by those who had overspent most in 2006, primarily because they were far more likely to switch to a cheaper plan. The results also show the oldest consumers and those taking medications for Alzheimer’s disease shared in these large improvements, despite the perception that Medicare Part D would be extremely confusing for them. This highlights the important, but often overlooked role of family members and others in helping to choose drug plans.

“Part D is an important context to study how well consumers can choose products due to the large number of lives and dollars involved,” explains Ketcham. “Our analysis of people’s decisions to switch plans reveals they respond to both past performance and upcoming changes in their current plans, adjusting to reduce overspending. This contradicts the view that consumers would become paralyzed by too many choices.”

The research on choosing from diverse options has broad health-policy implications. It provides guidance for reforming Medicare, but it also provides lessons on how to design the state health insurance exchanges that will be implemented under the health care reform bill.

Ketcham believes the findings also shed light on concerns about other types of products. For example, the new Consumer Financial Protection Bureau is designed to regulate items ranging from mortgages to credit cards.

“This new bureau was created out of fears that too many choices confuse consumers, causing them to stick with products that are not ideal for them and allowing companies to profit from their mistakes,” says Ketcham. “Currently, the bureau is focused on deciding how information about products must be conveyed to consumers, but ultimately, it may determine how many and what kinds of products can be sold in the U.S. Our results on Part D provide some reason for pause to question whether such regulations would be worthwhile or even harmful.”

The full study is available at