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How much choice is too much? The case of the Medicare prescription drug benefit.

Article Excerpt
A hallmark of personal freedom is choice: having alternatives available, and being given the autonomy to choose among them. Is it possible, then, to have too much choice? This would appear to be heretical, at least in economics, as consumers can always ignore the poorer alternatives. Some researchers, however, are starting to question the merits of consumers having a large array of choices. Large choice sets coupled with the desire to maximize (that is, choose the very best) have been found to be significantly related to greater sense of regret, reduced happiness, and even less satisfaction with the choices made (Schwartz et al. 2002).

Given this, it is noteworthy that the Medicare prescription drug benefit has so many plan choices. In 2008, nearly all states had more than 50 standalone drug plans from which to choose. When the stand-alone plans are combined with Medicare managed care plans, older adults often faced over 100 choices for drug coverage (Kaiser Family Foundation 2007). In contrast, among the working-age population who are covered by employment-based insurance, 37 percent have just one plan choice, and only 20 percent have more than five (Hanoch and Rice 2006).

While a number of studies have examined the relationship between choice size and consumers' decision quality and satisfaction, little research has been devoted to examining the effects of age on decision making. This is surprising as older adults are frequently asked to make many complex financial and medical decisions (Hanoch, Wood, and Rice 2007) even though cognitive ability tends to decline with age.

This Research Brief reports on an experiment in which older and younger adults were randomly assigned to a different number of hypothetical prescription drug plans that resemble those in the marketplace. Subjects, half of whom were age 65 or older, were assigned to a choice set of 3, 10, or 20 plans. We report on how age and number of plans affect objective measures of performance as well as subjective assessments of the experience, and we draw conclusions about problems associated with the design of the Medicare drug benefit.

BACKGROUND: CHOOSING A MEDICARE PRESCRIPTION DRUG PLAN

Surprisingly, little is known about how beneficiaries decide which prescription plan to purchase. There is, however, both objective and subjective evidence that the large number of Medicare drug plan choices has been problematic. The primary objective evidence so far concerns stickiness--that is, unwillingness to change plans from year to year, even when it is economically wise to do so. Two national surveys found that fewer than one tenth of enrollees switched drug plans during the open enrollment period between the first and second years of the Medicare drug program, and nearly half of those were low-income beneficiaries who were required to switch because their plan no longer covered them (Campbell and Morgan 2007; Neuman et al. 2007). This is of potential concern because plans that may have low costs 1 year often raise their premiums or change their formulary, leading to dramatic increases in premiums the following year (Kritz 2007). Furthermore, as Domino and colleagues (2008) have shown, 43 percent of beneficiaries change the prescriptions they use to such an extent that it would be cheaper if they switched to another plan, with potential savings of about $500 annually (Domino et al. 2008).

There is also subjective evidence that the amount of choice faced by older adults is problematic. Indeed, nearly three quarters (73 percent) of beneficiaries agree that the drug program is too complicated (Kaiser Family Foundation/Harvard School of Public Health 2006). Additionally, older adults say that they would prefer fewer choices. When a national survey asked older adults whether they would like Medicare to offer...

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