What Drove First Year Premiums in Stand-Alone Medicare Drug Plans?
AbstractMedicare's Part D offers heavily subsidized new drug coverage to 22.5 million seniors to date, of whom 16.5 million are in stand-alone drug plans (Department of Health and Human Services, 2006). The government delegated the delivery of the benefit to private insurance companies arguing that market incentives would lead them to provide coverage at the lowest price possible. The massive entry of plans and the large variety of actuarial designs and formularies offered make it complicated to assess how insurers set premiums during this first year of the program. This paper presents the first econometric evidence on whether premiums in the stand-alone drug plan markets are driven by the relevant factors predicted by insurance theory. Using data gathered from the Centers for Medicare and Medicaid Services, we measure a plan's generosity as the simulated out of pocket payments for different sets of drugs. We also identify the listed full drug prices by each insurer and merge these with other plan and geographical characteristics to test predictions about how insurers set premiums. We find evidence that a) the number of insurers in a market is big enough such that it does not appear to influence premiums, b) the full drug prices listed appear to be reflected to some degree in the premiums charged c) plan characteristics such as the provision of extra coverage are reflected in higher premiums, but overall there is a weak relationship between premiums and simulated out of pocket payments for different sets of drugs d) the institutional setting and regional market characteristics affect the firms' bidding behavior and their resulting premiums. Insurers appear to have responded strongly to program incentives such as the automatic enrollment of dual Medicaid-Medicare beneficiaries into low cost plans. As data for 2007 are made available, it will be important to see if plans follow similar pricing strategies in subsequent years of this program.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12595.
Date of creation: Oct 2006
Date of revision:
Note: AG HC HE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
- I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-11-04 (All new papers)
- NEP-HEA-2006-11-04 (Health Economics)
- NEP-IAS-2006-11-04 (Insurance Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Bresnahan, Timothy F & Reiss, Peter C, 1991.
"Entry and Competition in Concentrated Markets,"
Journal of Political Economy,
University of Chicago Press, vol. 99(5), pages 977-1009, October.
- Florian Heiss & Daniel McFadden & Joachim Winter, 2007.
"Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans,"
NBER Working Papers
13627, National Bureau of Economic Research, Inc.
- Florian Heiss & Daniel McFadden & Joachim Winter, 2010. "Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans," NBER Chapters, in: Research Findings in the Economics of Aging, pages 413-481 National Bureau of Economic Research, Inc.
- Florian Heiss & Daniel McFadden & Joachim Winter, 2008. "Mind the Gap! Consumer Perceptions and Choices," MEA discussion paper series 08156, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.