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Perverse Incentives in the Medicare Prescription Drug Benefit

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  • David McAdams
  • Michael Schwarz

Abstract

We analyze some of the perverse incentives that may arise under the current Medicare prescription drug benefit design. In particular, risk adjustment for a stand-alone prescription drug benefit creates perverse incentives for prescription drug plans' coverage decisions and/or pharmaceutical companies' pricing decisions. This problem is new in that it does not arise with risk adjustment for other types of health care coverage. For this and other reasons, Medicare's drug benefit requires especially close regulatory oversight, now and in the future. We also consider a relatively minor change in how the benefit is financed that could lead to significant changes in how it functions. In particular, if all plans were required to charge the same premium, there would be less diversity in quality but also less budgetary uncertainty and less upward pressure on drug prices.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12008.

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Date of creation: Feb 2006
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Publication status: published as McAdams, David and Michael Schwarz. "Perverse Incentives in the Medicare Prescription Drug Benefit." Inquiry 44, 2 (Summer 2007): 157-66.
Handle: RePEc:nbr:nberwo:12008

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  1. Thomas G. McGuire & Jacob Glazer, 2000. "Optimal Risk Adjustment in Markets with Adverse Selection: An Application to Managed Care," American Economic Review, American Economic Association, American Economic Association, vol. 90(4), pages 1055-1071, September.
  2. Mark V. Pauly & Yuhui Zeng, 2003. "Adverse Selection and the Challenges to Stand-Alone Prescription Drug Insurance," NBER Working Papers 9919, National Bureau of Economic Research, Inc.
  3. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1313-26, December.
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Cited by:
  1. Kyna Fong & Michael Schwarz, 2009. "Towards an Efficient Mechanism for Prescription Drug Procurement," NBER Working Papers 14718, National Bureau of Economic Research, Inc.
  2. Florian Heiss & Daniel McFadden & Joachim Winter, 2010. "Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans," NBER Chapters, National Bureau of Economic Research, Inc, in: Research Findings in the Economics of Aging, pages 413-481 National Bureau of Economic Research, Inc.

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