Making the Case Against Choice

In a paper on Medicare Advantage plans for the Kaiser Family Foundation, Marsha Gold argues that seniors would be better off with less choice. No, that’s not a misprint. She’s arguing that less choice is better than more choice.

The traditional economic view:

“…Traditional microeconomic theory holds that choice is good for markets and beneficiaries. The theory posits that market competition is a driving force for innovation and efficiency; such competition provides benefits by having many competitiors, none of whom dominates. Broad choice also makes it easier for beneficiaries to find options that best meet their individual medical needs, economic circumstances, and personal preferences.” [link, page i]

Gold’s view:

“…There are downsides to choice and competition, however. With more choice, there is less ability to achieve economies of scale, either within firms or overall in Medicare, and potentially more chances for competitors to “game” the system through product design. Such outcomes would make it harder to achieve overall goals of the Medicare program. Further, emerging empirical research in the areas of psychology and behavioral economics shows that, while consumers say they prefer having many choices, they do not necessarily respond well to such multiple options.”

Here’s a summary of the studies cited in the takedown of “traditional microeconomics” and the defense of the limited choice position:

1. A study showing that people are more likely to purchase gourmet jams or chocolates or to undertake optional class essay assignments when offered a limited array of 6 choices rather than a more extensive array of 24 or 30 choices, and that participants were more satisfied when their original options were limited. [Iyengar and Lepper, 2000] this should not appear This text should not show up This text should not show up
2. A scholarly article asserting that since the elderly are not well educated, don’t understand health insurance, and have cognitive declines that make assimilating new information difficult, Medicare choice is bad.

Even Nobel laureates in economics have made bad retirement investment choices and “…[I]n some urban areas, Medicare beneficiaries have as many as eighty-five choices of Medicare managed care and drug plans, because nearly any company wishing to sell benefits is permitted to do so.” [p. 60]

The article ignores the fact that the private sector tends to discover how to bundle complex services in ways that consumers prefer, even though it does point out that 40 percent of the privately insured said that plan selection was “very easy” compared with just 15 percent of those on Medicare.

It also fails to address the obvious point that Medicare may be overly complex because the people trapped in it are denied the most important choice of all: the choice to take Medicare funding and buy (non-Medicare) private coverage.

Instead, the authors conclude, “the choices facing the elderly can be simplified in many ways, but not until the many choices we have given them [in Medicare] are recognized as a potential disservice.” [Hanoch and Rice, “Can Limiting Choice Increase Social Welfare?” Milbank Quarterly 2006]

3. Two unpublished manuscripts, one in which people were no more likely to enroll in Medicare Part D in 2004-5 when their choices were increased, and one about a “national representative experiment conducted among those ages 65 and over” in which people offered structured choices between a designated health plan and alternatives “did not respond in predicted ways” and, horror of horrors, showed “status quo bias.” this should not appear this text should not show up this text should not show up
4. A study published by the Kaiser Family Foundation that uses actual drug purchases for each Medicare beneficiary in a 55,000 person sample of 2006 Part D drug purchases and compares the cost of each beneficiary’s drugs in his Part D plan to the lowest cost (combining both premiums and out-of-pocket drug costs) plan in his state. It finds that few beneficiaries choose the lowest cost plan even though doing so would have saved them hundreds of dollars.This study notes that while there are factors other than money, “[t]he analysis does not account for other reasons why enrollees might choose higher-cost plans, such as brand preference or plan quality differences,” its results nevertheless show that “choice across such a wide range of Part D plan options may not be in the best interest of beneficiaries who are looking to maximize their savings.” [Gruber, March 2009]

Senator Baucus apparently agrees with these sentiments. During the Medicare Part D debate he felt that the vast number of choices offered to the elderly is “daunting, confusing, and downright unattractive to many beneficiaries.” And although he “believes in choice,” it must be “meaningful choice—not choice for the sake of ideology. This drug card program has elevated the ideology of choice over the best interests of Medicare beneficiaries.”

Judging from the extent to which the collection of regulatory measures currently known as the Baucus bill restrict choice, what Senator Baucus has apparently missed is the fact that elevating the ideology of choice actually did, for perhaps the first time ever, produce a federal health entitlement program in which the cost of the program came in well below initial estimates.

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