We study choice over prescription insurance plans by the elderly using government administrative data to evaluate how these choices evolve over time. We find large "foregone savings" from not choosing the lowest cost plan that has grown over time. We develop a structural framework to decompose the changes in "foregone welfare" from inconsistent choices into choice set changes and choice function changes from a fixed choice set. We find that foregone welfare increases over time due primarily to changes in plan characteristics such as premiums and out-of-pocket costs; we estimate little learning at either the individual or cohort level.

We explore the in- and out- of sample robustness of tests for choice inconsistencies based on parameter restrictions in parametric models, focusing on tests proposed by Ketcham, Kuminoff and Powers (KKP). We argue that their non-parametric alternatives are inherently conservative with respect to detecting mistakes. We then show that our parametric model is robust to KKP's suggested specification checks, and that comprehensive goodness of fit measures perform better with our model than the expected utility model. Finally, we explore the robustness of our 2011 results to alternative normative assumptions highlighting the role of brand fixed effects and unobservable characteristics.

This paper investigates the degree to which choice inconsistencies documented in the context of Medicare Part D plan choice vary across consumers and geographic regions. Our main finding is that there is surprisingly little variation: regardless of age, gender, predicted drug expenditures or the predictability of drug demand consumers underweight out of pocket costs relative to premiums and fail to consider the individualized consequences of plan characteristics; as a result, they frequently choose plans which are dominated in the sense that an alternative plan provides better risk protection at a lower cost. We find limited evidence that the sickest individuals had more difficulty with plan choice, and we document that much of the variation in potential cost savings across states comes from variation in choice sets, not variation in consumers' ability to choose.

We evaluate the choices of elders across their insurance options under the Medicare Part D Prescription Drug plan, using a unique data set of prescription drug claims matched to information on the characteristics of choice sets. We document that elders place much more weight on plan premiums than on expected out of pocket costs; value plan financial characteristics beyond any impacts on their own financial expenses or risk; and place almost no value on variance reducing aspects of plans. Partial equilibrium welfare analysis implies that welfare would have been 27% higher if patients had all chosen rationally.

A large body of research has investigated whether physicians overuse care. There is less evidence on whether, for a fixed level of spending, doctors allocate resources to patients with the highest expected returns. We assess both sources of inefficiency, exploiting variation in rates of negative imaging tests for pulmonary embolism. We document enormous across-doctor heterogeneity in testing conditional on patient population, which explains the negative relationship between physicians' testing rates and test yields. Furthermore, doctors do not target testing to the highest risk patients, reducing test yields by one-third. Our calibration suggests misallocation is more costly than overuse.