Economics and Government

The Medicare prescription drug plan will save senior citizens billions of dollars, so why are so many of them afraid to sign up for it? You wouldn’t think such a beneficial program would have such a problem to get them to enroll now. Yet that is what seems to be happening. Senior citizens are confused. The government has turned the insurance companies loose, with the result that in some states there are more than 50 plans to choose from all of them complicated and nowhere is there a simple metric that people can use to determine which plan is best for them.

Seniors are clutching their heads and asking someone, anyone (their pharmacists, their kids, AARP) for help. Some of them will end up avoiding the plans entirely and missing out on big drug savings because they can’t figure out which plan to pick.

This reaction to the drug plan was completely predictable based on behavioral economics. There is now ample evidence that when you increase choice by offering more and more options, a point is reached at which freedom is not the result. This is true of trivial consumer choices, such as which flavor of jam to buy, and of extremely consequential choices, such as which 401(k) funds to put your retirement money in.

It is possible that over time, the drug plans now offered by insurance companies will shake out, choice will be reduced, plans will get simplified, and plans like the Freedom Funds will appear and even come to dominate the market because of their attractiveness to Medicare recipients. The Medicare prescription drug plan could have been designed this way from the start. Rather than letting insurance companies compete with plans, the government could have simply extended Medicare, offering perhaps a few choices and a simple metric for comparing options. The choices could have been designed to cater to the prescription drug needs of the overwhelming majority of citizens, with safety features that prevented people from mistakes. Under these conditions, the government could have used its leverage to control drug prices, instead of relying on the insurance companies to do so. And since Medicare is more efficient than any of its private alternatives, there is no reason to think that people would have given anything up (except waste and complexity) if the drug plan had been a government plan. If the government had moved in this sensible direction, it would not now have to persuade and strong arm people into signing up. Senior citizens would enroll in droves.

Why didn’t it happen this way? I think that the Bush administration regarded complexity as its friend, since it would reduce enrollment (and costs) and make the drug plan less of a budget buster. Many conservatives are skeptical that government can do anything right, and they feared that a government run benefit would bully drug companies and kill the incentives to create new drugs. Beyond this, if you believe that individuals are the best judges of their own welfare, giving them choices does more to enhance collective welfare than any universally imposed government program could, even one that permitted a limited number of options. Competing plans should free individuals to pursue their welfare as they see fit.

We now know that this simple belief is far off the mark as a description of the real behavior of real people. While a life without any freedom of choice would not be worth living, it appears not to be true that more choice inevitably leads to more freedom and greater well being. There may be a point when choice tyrannizes people more than it liberates them. The implication of this, both for individuals and for government officials, is that sound social policy cannot consist solely of throwing a greater menu of options at the American people. For the Medicare drug plans, less would be more.

# posted by Anonymous : 10:27 PM