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Perverse Incentives in the Medicare Prescription Drug Benefit

  • David McAdams
  • Michael Schwarz

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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File URL: http://www.nber.org/papers/w12008.pdf
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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
Note: HC PE
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Web page: http://www.nber.org
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  1. 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.
  2. 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, vol. 90(4), pages 1055-1071, September.
  3. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 85(5), pages 1313-26, December.
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