Working Paper: NBER ID: w21783
Authors: Amanda Starc; Robert J. Town
Abstract: Insurance plan design has important implications for consumer welfare. In this paper, we model insurance design in the Medicare prescription drug coverage market and show that strategic private insurer incentives impose a fiscal externality on the traditional Medicare program. We document that plans covering medical expenses have more generous drug coverage than plans that are only responsible for prescription drug spending, which translates into higher drug utilization by enrollees. The effect is driven by drugs that reduce medical expenditure and treat chronic conditions. Our equilibrium model of plan design endogenizes plan characteristics and accounts for selection; the model estimates confirm that differential incentives to internalize medical care offsets can explain disparities across plans. Counterfactuals show that strategic insurer incentives are as important as selection in determining endogenous plan characteristics.
Keywords: health insurance; Medicare; benefit design; externalities
JEL Codes: I13; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| MAPD plans (I18) | more generous drug coverage (H51) |
| more generous drug coverage (H51) | higher adherence (C92) |
| higher adherence (C92) | lower medical costs (I18) |
| 1% increase in prescription drug spending (H51) | reduces non-drug expenditure by approximately 27 cents (H51) |
| strategic insurer incentives (G22) | determine plan characteristics (G52) |
| design of benefits (J32) | influences consumer behavior (D12) |
| absence of selection (D69) | insurer drug spending increases by an additional 7% (H51) |