Drug Plan Decisions: When Too Much Choice is a Bad Thing

Sometimes having too many choices leads to bad decision-making. As political candidates and policymakers toy with the idea of "consumer-driven" health care, it's worthwhile to look at a body of research in behavioral economics. Multiple choices may lead to confusion and poor choices.

The conventional wisdom in conservative policy camps is that more choice is better: When consumers have many selections for health options, they will choose wisely and it will eventually reduce costs for everyone. That's what economists call the "rational actor" model, which assumes that on economic questions we all make decisions in our best interests. That's rarely the case in real life, though.

A classic situation can be found in Medicare's Prescription Drug (Part D)program, where beneficiaries have a choice of plans. Ideally, they should be choosing programs that are likely to cover the drugs they are most frequently prescribed. But what if doctors change prescriptions, patient conditions change or new generics come on the market? Do the plans have the flexibility for such changes? Do most beneficiaries simply choose the lowest premiums or consider a wide range of options?

To date, Part D has generally been considered a success. A voluntary program heavily subsidized by taxpayers, enrollment was chosen by more than 90 percent of eligible participants when it became available in 2006.Before Part D, beneficiaries either paid for drugs out-of-pocket or were covered by Medicare Supplement Health Insurance, or "Medigap," policies. American taxpayers pick up 75 percent of the program's costs, although no candidate has proposed scaling back Part D to save money. It's one of Medicare's most popular offerings.      

Yet bad choices seem to be the norm when making Part D decisions, according to a new working paper to be published by the National Bureau of Economic Research. A team of researchers from four different universities found that fewer than 10 percent of individuals enroll in the most cost-effective plans. Beneficiaries apparently focus more on their out-of-pocket premiums than on the overall benefits of the dozens of available plans. The researchers also discovered the following:

• Typically about 40 plan options are available, but plan choice is difficult given the "uncertainty with respect to their future health status and needs." Changing medical conditions complicate the selection process even more.
• The wide range of options—illustrated in Medicare's Part D "plan finder" tool—lists available plans, premiums and out-of-pocket costs. But it may not help participants "fully optimize" or choose the plan with the best-possible coverage at the lowest price.
• Decisions are further complicated by deductibles, co-payments and formulary (list of drugs) restrictions.
• Participants may be paying attention to the wrong information when they make their decisions. "Consumers pay more attention to premiums than to benefit generosity, so that they are nudged more toward low-premium standard or equivalent plans."

When presented with an array of information, it's always difficult to make an informed and prudent choice. This has been a problem in a number of areas, from credit cards to retirement plans. The American dictum has typically assumed that more is better and that myriad options offered by competitors will drive down costs. In the face of this study, and many others in behavioral economics, that doesn't seem to be the case. The researchers conclude:

"Our results then do not support the proposition that consumers can make and benefit from good choices in private health insurance markets, and direct health care resources to their best use."

Deeper Questions From Behavioral Economics Research

Will participants end up paying more for medications if their conditions change or require drugs not covered by their plan? Dr. Don McCanne, extended the study's findings to the evolving state health exchanges due to be launched in 2014. In a blog for the Physicians for a National Health Plan, a group that advocates eliminating Part D and replacing it with a single-payer model, McCanne summed it up this way:

"If over 90 percent of purchasers of the Medicare Part D drug plans fail to choose the plans that are best for themselves, then how could we ever expect them to make wise decisions in selecting the best plans from the much more complex plans of the state health insurance exchanges, or, for that matter, from the choice of Medicare Advantage plans or the plan choices to be offered in the proposed premium support (voucher) markets?

Behavioral economists, who've been focusing on how people make decisions, would argue that perhaps Part D's interface could be redesigned so that participants could make more informed decisions.

One principle in this area of research involves a phenomenon called "loss aversion." Researchers such as Richard Thaler from the University of Chicago have found that people are generally twice as sensitive to losses than gains. Most people would rather avoid losing money, which often means they will pick a plan for the wrong reasons. How does that apply to a Part D decision? Let's say the plan finder was redesigned to show the probability of incurring out-of-pocket costs for each plan, given customized variables for the user. What if a senior’s prescriptions change? What if a senior bought more generics?

"Framing" is another quirk of decision-making that could be used in Part D. When a person views things in a certain way, such as evaluating short-term and long-term results, they tend to make different decisions. Suppose someone was able to choose a plan based on a long-term history of prescriptions? That might help participants make better choices.

Participants already confused by too many options may also be misled by "peer effects," that is, choosing a plan based on what their friends and families selected. This could also be short-circuited by offering a better plan finder.  

It may sound undemocratic to suggest that streamlining the decision-making process by offering fewer choices could be better for the majority of participants. Yet in the larger arena of consumer-driven health care, the results of the study don't bode well for the multiple-choice model, which is the core of the "premium support" plan offered by the Romney/Ryan platform. 

When faced with multiple variables, beneficiaries may continue to default to what they perceive as the cheapest plans as measured by premium dollars, even though these plans might not serve their needs.

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