The Medicare Modernization Act, with Medicare Part D as its centerpiece, contains the social policy innovation of the decade.  In short, the innovation is using the private market to deliver Medicare Part D drug coverage and, not so innovative, encouraging insurer and consumer participation in Medicare Advantage programs.  It’s precepts are drawn from theories of consumer economics:

  • overall social welfare is maximized by consumers pursuing individual self-interest;
  • consumers evaluate information regarding price, service, preferences, and quality;
  • consumers can rank their preferences and make a decision developed through rational deliberation;
  • competitive firms will be rewarded for efficiency in meeting consumer needs.

All in all, plenty to scoff at.  Scholars and others have argued that these precepts are lacking.  That they ignore group behavior and herd mentality, they fail to account for emotion, that they exclude any model of how people actually deal with complex decision making, and that they ignore the persuasive power of marketing.

While we can’t put these issues to rest, Deft’s information provides a picture of the health insurance experience of America’s seniors.  We have information about how many seniors switched medical and drug plans during the fall 2006 enrollment cycle, the reasons for their switching, and data on other elements of their experience.

Seniors Shopped.

According to Deft Research’s Senior Market Dynamics 2007 study, nearly half (49%) of all seniors shopped for other health plans.  This includes customers of Medicare Advantage, Medigap, and Dual Eligibles.  Even retirees shopped for alternatives to their employer-sponsored plan — if they are paying a high premium, many retirees are looking to the private market for relief.

This indicates a broad awareness among seniors of health care options and of the annual enrollment periods during which they can do their switching.  It means that half of all seniors were willing to sustain some personal cost in order to evaluate options.  That cost includes the effort needed to learn about options, time spent searching for information, and emotional costs incurred by exposure to potentially confusing and frustrating material.

This supports a picture of information being pursued and consumed by seniors.

Seniors Switched.

Senior Market Dynamics 2007, says that eleven percent of seniors did switch coverage this year.  This includes 14% of dual eligibles switching drug coverage, 16% of Medicare Advantage customers, and 10% of Medigap customers switching plans.

Purchasing or changing health or drug coverage is infrequent and risky.  So to see switching from as many as one in six seniors indicates many decisions were made despite real obstacles.  In addition to the effort, time, and emotional costs of shopping, switching includes costs of its own.  These include the effort of learning how to use a new system and customer service center, time lost doing necessary paperwork, and the risk of future problems such as poor claims administration, providers who are unhappy with the insurance, and failure to completely understand the benefits’ costs and limitations.

For context let’s compare another complex product whose change is infrequent and risky.  In the mobile phone market, different reports say that between 4% and 29% of consumers switch companies every year.  So American seniors, switched their health and drug coverage at a rate consistent with mobile phone consumer switching by populations of all ages.

Deft’s study says that the top reasons for switching were to improve price and benefits.  Both rational reasons, derived from rationale evaluation of information.  The cost of obtaining this information was apparently lower than the benefit gained by knowing more.

Seniors Did Not switch.

Most seniors did not switch medical or drug coverage carriers.  To understand this, there are rules of thumb. 

  • Consumers are sensitive to the relative advantages of making a change.  It is not usually enough for a different product to have merit on its own, it must be significantly better than what the consumer is currently getting.  When asked, most consumers say the biggest barrier to switching is satisfaction with their current plan.
  • Consumers are loss averse.  The pain of giving something up is more significant than the satisfaction of gaining something new.  For many seniors, the principle difficulty is losing a long-term relationship with their insurer.
  • Seniors have different reference points.  A widow with health issues might find a plan offering health coaching and visiting case managers worth switching to.  But another senior with no health problems may find having any supplemental insurance at all a difficult expense to justify.

Consumers don’t switch when there is no clear benefit being offered by the new company.  This is true of seniors as it is of any age group.

Private Plans for Duals

Deft’s Senior Market Dynamics 2007 study measured differences in perception and experience between Dual Eligibles whose health coverage came to them from a private plan compared to those whose coverage came from a state program.

  • Duals in private plans were more confident that their coverage would take care of them “should the worst happen;”
  • Private plan enrollees were more likely to have switched to a generic drug or to have switched medications to avoid copayments or to save money;
  • State program enrollees were more likely to have skipped a doctor visit or to not fill a prescription to avoid costs;
  • Private plan enrollees were more likely to say that it was easy to understand their drug plan options, and that they have several choices of health plan;
  • State program enrollees were more likely to have been assigned to their current drug plan.  They did not choose it.

Dual Eligible seniors in private plans were more likely to have switched drug coverage.  Switchers were more likely to believe their health and drug coverage had gotten better.

Social Experience

For Duals and others who switched, the study finds that switching is a social experience.  Compared to those who shopped but didn’t switch, the biggest difference was that switchers had access to an insurance agent who helped them.  Dual switchers were also more likely to enroll through a community center, other switchers were more likely to enroll at a seminar.  Those who shopped but didn’t switch used the mail, the phone, or an employer for their last insurance enrollment.  Shoppers were more likely than switchers to say they made their last insurance decision alone.

Conclusion

Deft’s study supports an image of an active consumer market for senior health insurance.  Information is obtained, effort is made to understand it, helpers are found.  The level of switching indicates that competition among plans is spurring some to see that the benefits gained are greater than the costs of switching.  Insurance agents and community organizations play important roles by helping someone who wants to switch get it done.  Switchers say switching was easy and that they’ll do it again if a better deal comes along.

When comparing dual eligibles in private and state programs, those in private plans were more optimistic about their coverage, more informed about their options, and more likely to engage in positive rather than destructive health behaviors to save money.

More information:  http://johndoesdesign.com/dev/deft/pdf/MD07_offer.pdf