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Adverse Selection and the Challenges to Stand-Alone Prescription Drug Insurance

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  • Mark V. Pauly
  • Yuhui Zeng
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    Abstract

    This paper investigates a possible predictor of adverse selection problems in unsubsidized stand-alone' prescription drug insurance: the persistence of an individual's 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 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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    File URL: http://www.nber.org/papers/w9919.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9919.

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    Date of creation: Aug 2003
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    Publication status: published as Pauly, Mark V. and Yuhui Zeng. "Adverse Selection And The Challenges To Stand-Alone Prescription Drug Insurance," Forum for Health Economics and Policy, 2004, v7, Article 3.
    Handle: RePEc:nbr:nberwo:9919

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    Cited by:
    1. Anne E. Hall, 2007. "The value of Medicare managed care plans and their prescription drug benefits," Finance and Economics Discussion Series 2007-19, Board of Governors of the Federal Reserve System (U.S.).
    2. David McAdams & Michael Schwarz, 2006. "Perverse Incentives in the Medicare Prescription Drug Benefit," NBER Working Papers 12008, National Bureau of Economic Research, Inc.
    3. Martin Gaynor & Jian Li & William B. Vogt, 2006. "Is Drug Coverage a Free Lunch? Cross-Price Elasticities and the Design of Prescription Drug Benefits," NBER Working Papers 12758, National Bureau of Economic Research, Inc.
    4. Kosali I. Simon & Claudio Lucarelli, 2006. "What Drove First Year Premiums in Stand-Alone Medicare Drug Plans?," NBER Working Papers 12595, National Bureau of Economic Research, Inc.
    5. Steven Pizer & Austin Frakt & Roger Feldman, 2009. "Nothing for something? Estimating cost and value for beneficiaries from recent medicare spending increases on HMO payments and drug benefits," International Journal of Health Care Finance and Economics, Springer, vol. 9(1), pages 59-81, March.

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