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Medicare Part D: More choices mean less choosing (3 of 3)

When she was a graduate student at Stanford University in the 1990s, Sheena Iyengar was fascinated by the number of gourmet food choices at a large store in nearby Menlo Park. On the store’s shelves there were almost 250 kinds of mustard, 150 types of vinegar, and some 500 varieties of produce. But when she visited the store she rarely purchased anything, and she wondered whether the reason was that she was overwhelmed by so many choices.

Iyengar, who is now a business professor at Columbia University, persuaded the store’s manager to set up a tasting booth for jam near the store’s entrance. Several hours each day the tasting booth offered customers a choice of six flavors of jams that they could sample. Then for several additional hours each day, the tasting booth expanded the number of selections to 24 flavors.

After weeks of collecting data, Iyengar found that when 24 jams were available for tasting, shoppers sampled more often. But when only six jams were available, customers were more likely to purchase. The difference was striking – customers bought jam only three percent of the time when there were 24 flavors to choose from, but they purchased jam 30 percent of the time when there were just six choices. Iyengar’s jam study, now considered a classic in the field of decision theory, was published in 2000 and is briefly summarized in her 2010 book The Art of Choosing, which is reviewed here.

If having 24 flavors of jam to choose from is so confusing that most people decide not to buy any jam at all, how can they be expected to cope with 31 Part D stand-alone plans? That’s the average number of plans that people can choose from when they select their 2012 Part D coverage, according to a Kaiser Family Foundation Data Spotlight released earlier this month. And while not wanting to offend jam makers, one can reasonably say that comparing even two stand-alone drug plans is several times more confusing than comparing two jams.

Here’s one indication of how daunting the Part D selection process can be: the excellent book Medicare Prescription Drug Coverage for Dummies requires 350 pages to explain what people should look for and how they should choose a plan. Another hint comes from the book’s introduction, which begins, “If you’re reading this book, chances are you’re baffled.” And later in the introduction, the book describes the Part D selection process as one that can bring on an acute form of paralysis.

Retirees’ confusion about Part D and the selection process is well known. Last year a survey of more than 700 retirees found that 69 percent of them would prefer that Medicare offer a limited number of options.

In addition, a published meta-analysis looked at 30 articles that had reported original findings about the Part D selection process. The 30 articles were based on studies that evaluated seniors’ knowledge of Part D and their decisions to enroll. The meta-analysis summarized its findings by saying that the 30 studies had a common theme – retirees have great difficulty in choosing in the lowest-cost plans and thus are not inclined to switch plans.

Medicare’s data are consistent with the results of these studies. Because they don’t understand Part D and don’t know how to evaluate plans, people stay put in their current coverage. The Medicare Payment Advisory Commission reports that only six percent of the people with Part D coverage voluntarily change plans each year.

Meanwhile Part D plans frequently alter their cost-sharing and benefit designs, creating the strong likelihood that retirees who don’t review their stand-alone plans each year pay too much for prescription drugs. One study published in the Journal of the American Pharmacists Association analyzed the drug regimens of 50 patients for the years 2007-2008 and found that only 12% of the lowest-cost plans for these patients’ drugs in 2007 were also the lowest-cost plans for their drugs the following year.

How much money do retirees lose by remaining in over-priced plans? Two years ago the Kaiser Family Foundation published an analysis of prescription drug records of 55,000 people in Part D stand-alone plans in 2006. The analysis found that only six percent of them were in the lowest-cost plans for the drugs that they took, and that the remaining 94% paid an average of $520 more than they would have in the lowest-cost plans. Moreover, the top five percent of the overpayers spent an average of $1,360 more than if they’d been in the lowest-cost plans.

Because it pays for about 75% of Part D’s costs, the government loses money as well – probably billions of dollars each year – when people remain in high-priced plans. In its 2011 Status Report on Part D the Medicare Payment Advisory Commission mentioned that by remaining in costly Part D plans, people cost the government money. The report said that “barriers to switching plans thwart the program’s intended goal of competition. That is, if beneficiaries are unwilling to switch, even when faced with a significant premium increase, sponsors have less of an incentive to compete on premiums and control drug spending” (page 319).

If as the Kaiser Family Foundation analysis indicated, 94% of people enrolled in Part D plans overpaid by an average of $520 in 2006, that means the government also paid too much. Because Medicare pays approximately three-fourths of the cost of the Part D benefit, then in 2006 it could have overpaid by an average of $1,560 (3 x $520) for 94% of the beneficiaries in stand-alone plans.

Today there are about 8.5 million people in stand-alone plans, not counting those who qualify for a low-income subsidy (the Kaiser Family Foundation analysis did not include low-income individuals). If the government is overpaying by an average of $1,560 for the 94% of these 8.5 million, then it is losing more than $12 billion a year by subsidizing wrong choices.

But that’s only conjecture. Perhaps 94% is not the right percentage for the Medicare population at large. And almost certainly the $520 overpayment in 2006 has increased. Yet even if those numbers were known, there’s still no simple way to estimate how much the government loses. For one thing, Part D plans’ annual bids do not identify prices for specific drugs, but for a formulary of 900 or more drugs. Each bid is then compared to a benchmark that is based on all of the bids, with plans that have richer benefits required to charge higher premiums.

This process, in which each plan is measured against a benchmark that’s comprised of all the plans’ bids, would make sense in a robust market where shoppers are actively engaged in searches to find the best deals and where plans have incentives to lower their prices. But as the Medpac report says, when only six percent of beneficiaries switch plans each year, then plans have fewer reasons to submit competitive bids.

Given Part D’s complexity, it’s extremely difficult to get people to compare plans, which can only be done only by a computer-literate person using the Medicare web site’s Rx Plan Finder. Between 10% and 20% of non-institutionalized retirees have some degree of cognitive impairment, and 40% have never used a computer. What’s more, only 20% of retirees in their 80s know how to use computers, and these are the individuals who are are likely to spend the most on prescription drugs.

Still and all, retirees have two good reasons to evaluate their Part D coverage before December 7, when this year’s annual open enrollment closes. Not only can they save themselves money, but they can help to control government spending and bring down the deficit.

To do that, they can call 800-MEDICARE and say that they want to find a low-cost plan for their prescription drugs. Or, when they call that number they can ask for a referral to a local non-profit counseling agency that will help them find the lowest-cost plans for the drugs that they take.

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