Adverse Selection and the Challenges to Stand-Alone Prescription Drug Insurance
AbstractThis paper investigates a possible predictor of adverse selection problems in unsubsidized stand-alone prescription drug insurance: the persistence of an individuals high spending over multiple years. Using Medstat claims data and data from the Medicare Survey of Current Beneficiaries, we find that persistence is much higher for outpatient drug expenses than for other categories of medical expenses. We then use these estimates to develop a simple and intuitive model of adverse selection in competitive insurance markets and show that this high relative persistence makes it unlikely that unsubsidized drug insurance can be offered for sale, even with premiums partially risk adjusted, without a probable adverse selection death spiral. We show that this outcome can be avoided if drug coverage is bundled with other coverage, and we briefly discuss the need either for comprehensive coverage or generous subsidies if adverse selection is to be avoided in private and Medicare insurance markets.
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Bibliographic InfoArticle provided by De Gruyter in its journal Forum for Health Economics & Policy.
Volume (Year): 7 (2004)
Issue (Month): 1 (January)
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Web page: http://www.degruyter.com
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- Melissa Boyle, 2008. "Costs and Benefits of Elderly Prescription Drug Coverage: Evidence from Veterans’ Health Care," Working Papers 0803, College of the Holy Cross, Department of Economics.
- Sinaiko, Anna D. & Hirth, Richard A., 2011. "Consumers, health insurance and dominated choices," Journal of Health Economics, Elsevier, vol. 30(2), pages 450-457, March.
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