Switching Costs in the Market for Medicare Advantage Plans

Abstract

Medicare eligibles have the option of choosing from a menu of privately administered managed care plans, known as Medicare Advantage (MA) plans, in lieu of conventional fee-for-service Medicare coverage ("original Medicare"). These plans often provide extra benefits to enrollees, but may impose large switching costs as a result of restrictive provider networks, differences in coverage across plans, and learning and search costs. I propose a structural dynamic discrete choice model of how consumers who are persistently heterogeneous make the choice among MA plans and original Medicare based on the characteristics of the available MA plans. The model explicitly incorporates a switching cost and changes over time in choice sets and plan characteristics. I estimate the parameters of the model, including the switching cost, using the methods developed by Gowrisankaran and Rysman (2011). The estimates indicate that the switching cost is statistically and economically significant. Through a series of counterfactual analyses, I find that the share of consumers choosing MA plans in place of original Medicare would more than triple in the absence of switching costs, and nearly double if plan exit and quality changes were eliminated. I also find that when switching costs are accounted for the Medicare Advantage program only minimally increases consumer welfare.