Working Paper: NBER ID: w12008
Authors: 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.
Keywords: No keywords provided
JEL Codes: I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Risk Adjustment (G52) | Adverse Selection (D82) |
| Risk Adjustment (G52) | Discouraging Enrollment of High-Cost Patients (I13) |
| Risk Adjustment (G52) | Race to the Bottom in Coverage Quality (L15) |
| Requirement for Formularies to Cover Broader Range of Drugs (I13) | Increased Drug Prices (D49) |
| Inclusion of All or Substantially All Drugs in Therapeutic Classes (L65) | Upward Pressure on Prices (E31) |
| Fixed Premium Subsidy (G52) | Better Coverage without Driving Up Costs (G52) |