In short, this proposal sets out to study the role of advertising in the Medicare HMO markets. The first goal is to estimate a causal relationship between advertising and market share, using collected, but unreported (to consumers) HMO report card ratings as an instrument for advertising expenditures. This analysis is important in the context of the increasingly prominent role that advertising is now playing in the Part D HMO market. Due to the limited literature in this area, uncovering this important relationship will contribute to both the health economics literature as well as the general advertising economics literature. The second goal is to provide a better estimate of the value of report cards. Prior studies of report cards have generally found that they have a significant, yet small, impact on market share. None of these studies incorporate a role of advertising. This dissertation plans to be the first to study the individual and combined impacts of advertising and report cards on movements in market share. In addition to uncovering a better estimate of the value of report cards, it will provide insight into how a firm's advertising strategies can either mitigate or enhance the report card impact. Lastly, our goal is to provide rigorous empirical evidence to test the link between advertising and favorable selection of health risks. The prior literature has been limited by lack of HMO claims data to study the attracted health risks by HMOs. We plan to circumvent this problem by using individual-survey data from each operating HMO to gather self-reported measures of health risk. The analysis will allow a rigorous test of how advertising is related to favorable selection, and will add to our understanding of the role that advertising plays in the Medicare HMO market.
Relevance and Impact This proposal will be the first in-depth analysis of the impact of advertising on market shares and favorable selection in the Medicare HMO market. In addition to the theoretical and empirical contribution to the health economics literature, this analysis will provide important insight to policymakers. We will explore the role of advertising as a potential force to mitigate or enhance report card value. Given the large amount of resources invested in report cards by CMS, understanding advertising will be particularly relevant as CMS works to improve the ability of seniors to make optimal health plan decisions. Also, the overwhelming amount of advertising by Part D plans has resulted in significant controversy regarding its impact on seniors. This study will allow policymakers to make more informed decisions regarding the effectiveness of prior regulation on advertising, and the potential need for more regulation moving forward. Beyond Medicare HMOs, advertising is becoming a very popular mechanism used by other healthcare firms such as hospitals, clinics, and physician groups. This study will provide a methodology to explore the impact of advertising in these markets. Report cards have also been widely used in these arenas to help consumer decision-making, yet the potential of advertising to thwart or enhance these efforts have not been explored. We hope that our analysis of Medicare HMOs will provide a basis for further research to explore the implications of advertising in many different healthcare settings, and thus allow for the creation of better policies to improve patient decisions and in turn, patient health.
