Duke 2008 | ASHE | Equity and Efficiency in Health and Healthcare

In nearly all states, seniors wishing to purchase a stand-alone Medicare drug insurance plan face over 50 choices. If one includes Medicare managed care plans, in many urban areas they face over 100. This sharply contrasts with the situation for the working-age population, who typically have four or fewer insurance plans from which to choose.

Although economic theory implies that more choice is better for consumers, a number of recent studies have begun to question this, noting such factors as cognitive overload, regret about the paths not taken, and greater dissatisfaction with the choices that are made. These issues, however, are hardly new. Over fifty years, ago Herbert Simon posited that more choice is not necessarily better because of the cognitive limitations of the brain, a concept that he coined, 'bounded rationality'. Although Simon did not focus on seniors, these issues are especially challenging to this group, who use medical care most frequently but who often have to cope with declining cognitive abilities.

In this paper, we introduce and analyze a proposal that keeps the current structure of the Medicare drug program, but limits the number of choices that seniors face. Briefly, we propose that the Medicare program issue requests for proposals to insurers, and then winnow down the number of choices, offering only a handful (perhaps 10) to seniors. The winnowing process would be based on a number of factors, including variety in terms of drug formularies, premiums, and cost-sharing requirements.

The bulk of the paper provides an analysis of three case studies in which government has winnowed down choices. Two examples are from the health area: Arizona's Medicaid program (called the Arizona Health Care Cost Containment Program); and selective contracting of hospitals wishing to provide care to California Medicaid enrollees. The other is from the employee benefits area: plans offered to state employees to shelter retirement income through 403(b) and 457 plans.

We analyze lessons from the three case studies with respect to our proposal according to six sets of factors. Briefly, we find:

Choice: There is ample choice available; perhaps too much in that not as much winnowing down of choices has been sustained over time.

Stability: The programs show a great deal, each having been in place for 20 or more years.

Simplicity: In two of the three programs, choices facing consumers are easier than they would be otherwise.

Competition: It does not appear to have been stifled as there are numerous competitors, and in each case costs are believed to have been controlled.

Innovation: In general, there are few concerns about whether the programs have been able to adopt to the changing environments they face. There is reason to be concerned however, that selectivity may have loosened over time.

Feasibility: The three examples are politically feasible, but as each is a state program, there are concerns about the feasibility of a national proposal like ours.

We conclude by applying these lessons to evaluate the proposal.