A few years ago my colleague Steve Pizer and I were funded to study new plan options that became available to Medicare beneficiaries in 2006, chief among them stand-alone prescription drug plans (PDPs). PDPs quickly became the most popular means within Medicare for beneficiaries to obtain drug coverage (the other option being Medicare Advantage plans that offer drug benefits). However, PDPs were not uniformly more popular. There was (and is) some geographic variation in their popularity.
We were interested in understanding what factors were associated with geographic variation in PDP enrollment. That is, why were PDPs more popular in some regions than in others? Standard economics models to investigate such a question would include measures of price (premium), competition, and demand and supply factors. We developed such a model and then did something a little unusual.
On a lark, we threw in the percent of a county’s electorate that voted for Bush in 2004. Interestingly, this turned out to be very strongly and positively correlated with proportion of beneficiaries in a county who enrolled in a PDP. Why would this be? For an answer (or a hypothesis really) we turned to behavioral economics and wrote up the results in a 2007 Health Economics paper titled “Attribute Substitution in Early Enrollment Decisions into Medicare Prescription Drug Plans.”
The key notion from behavioral economics upon which our hypothesis hangs is that of “attribute substitution.” Attribute substitution is a form of intuitive thinking in which readily accessible attributes of an object are used as proxies for the less accessible attributes relevant to a rational decision. In the case of PDPs, we hypothesized that beneficiaries might have substituted the recommendations of respected political leaders for the less accessible calculations of expected financial values of Medicare plans.
To put it bluntly, perhaps some beneficiaries heard Bush and others in his Administration touting the benefits of the new drug plans. Finding it otherwise difficult to make their own independent assessment of the relative merits of various coverage options, beneficiaries may have substituted officials’ enthusiasm for PDPs for their own prediction of its benefits. That’s a type of shortcut many of us make: we rely on the “expert” advice of others we trust rather than do our own analysis. In this case, there is geographic variation of degree of trust in the Bush Administration, which we operationalized as proportion of 2004 Bush vote.
We found that elasticity of PDP enrollment with respect to the Bush vote to be 0.14 (a 10% change in Bush vote is associated with a 1.4% change in PDP market share). To obtain a sense of the relative importance of this effect, we calculated the change in PDP enrollment due to a one-standard deviation change in each of the independent variables in our model separately. We found that the effect of the Bush vote is larger than the effect of other variables that are generally accepted to be important and relevant factors associated with enrollment decisions: premium, level of beneficiary educational attainment, county urban/rural status, provider density, income, and diagnosis based risk score.
So, an administration’s enthusiasm and popularity can have a significant impact on the early response to a new program. That’s a fairly intuitive result, and it is nice to see it is supported by the data. This paper was an interesting walk through a small tract of behavior economics. It is something I’d like to pursue further but not something for which I’m funded. So it will likely be a long time before I try anything like this again.