Should Medicare Enrollees Be ‘Nudged’?: New Research Reveals Impact of Default Insurance Plans

Public health insurance is not one-size-fits-all, but too often, enrollees never deviate from their randomly assigned plans. A new working paper reveals the impacts of such behavior—and suggests that tailoring default rules to “nudge” individuals can be much more effective for ensuring health and wellness.

Scholars from the University of Chicago, Harvard Medical School, and the National Bureau of Economic Research found that more than one half of low-income elderly Medicare Part D recipients don’t opt out of their randomly assigned prescription drug insurance plan within the first five years of eligibility, leading to lower drug usage for chronic conditions such as diabetes and hypertension and unnecessary financial hardship. 

The paper found further that, upon enrollment in Medicare’s Low Income Subsidy (LIS) program, only 16% of beneficiaries opt out of their default Part D drug plan and actively choose a different plan. There are 14 million LIS beneficiaries, representing 23 percent of the total universe of Medicare recipients, roughly 4% of Americans. 

As beneficiaries become eligible for the program, a Medicare algorithm randomly selects a default prescription drug plan from a set of pre-specified private insurer options with formulas covering different drugs. The researchers show that because the vast majority of recipients passively accept the default option, this group of low income, elderly Americans end up cutting back on their drug utilization by an average of 6.4% and as much as 12.6% for those in the worst-fitting plans—portending worse health outcomes for an already at-risk population. 

Released by the Becker Friedman Institute for Economics, the paper was co-authored by Zarek Brot-Goldberg, an expert on regulatory design in the U.S. health care sector and an assistant professor at the Harris School of Public Policy.

“The reality is that the stakes of default choices are high for many people,” Brot-Goldberg said. “Our research shows that consumers have a surprisingly strong tendency to follow default plans, and that this behavior can have ramifications for public health.”

This research builds on the extensive and growing body of research examining default rules across society, which confront policymakers and everyday Americans when it comes to choices with retirement savings plans, organ donation, electricity pricing, and other forms of health insurance. 38 state-run Medicaid programs rely on similar default design. 

The authors conclude that the current Medicare Part D design is sub-optimal due to the combination of the decision stakes being so high for program enrollees and the preponderance of beneficiaries passively accepting poor options for themselves. 

A more “paternalistic” default model, the authors argue, in which the rules are not random but are suited to help people, may be a more effective design.  The Maine system may be one model for health insurance policymakers to evaluate more closely. The only state to automatically enroll Medicare Part D LIS enrollees using a “smart” default, the program’s default mechanism is based on existing enrollee drug usage rather than random assignment. 

“The study’s findings have important policy implications in an area of health policy that contributes to inequality of outcomes for low income, elderly Americans,” said Tim Layton, associate professor of health economics at Harvard Medical School and a co-author of the study.