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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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  • David McAdams & Michael Schwarz, 2006. "Perverse Incentives in the Medicare Prescription Drug Benefit," NBER Working Papers 12008, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12008
    Note: HC PE

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    References listed on IDEAS

    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, 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, vol. 85(5), pages 1313-1326, 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,in: Research Findings in the Economics of Aging, pages 413-481 National Bureau of Economic Research, Inc.

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    JEL classification:

    • I1 - Health, Education, and Welfare - - Health

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