Working Paper: NBER ID: w22338
Authors: Kurt Lavetti; Kosali Simon
Abstract: The design of Medicare Part D causes most Medicare beneficiaries to receive fragmented health insurance, whereby prescription drugs and other medical care are covered by separate insurance plans. Fragmentation of insurance plans is potentially inefficient since separate insurers maximize profits over only one component of healthcare spending, despite many complementarities and substitutabilities between types of healthcare. Fragmentation of some plans but not others can also lead to market distortions due to differential adverse selection, as integrated plans may use drug formulary designs to induce enrollment by patients who are profitable under Parts A & B, while stand-alone drug plans have no such incentive. We study whether the design of insurance plans in Medicare Part D reflects these two differences in incentives using data on the universe of Part D plan formularies, drug prices, and Medicare claims data. We find evidence consistent with both hypotheses. Relative to fragmented plans, integrated plans systematically design their drug formularies to encourage enrollment by beneficiaries with medical conditions that are profitable under Parts A & B. However, integrated plans also more generously cover drugs that have the potential to causally reduce medical costs. These large differences in incentives and plan design between integrated and fragmented plans are likely the precursors of substantial differential selection of enrollees, and the basic design of Medicare Part D abets this covert selection.
Keywords: Medicare; Part D; Formulary Design; Adverse Selection; Healthcare Spending
JEL Codes: I11; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| integrated plans design drug formularies (I18) | encourage enrollment by beneficiaries with profitable medical conditions (I18) |
| integrated plans cover drugs more generously (H51) | lower medical costs (I18) |
| differences in formulary design (I18) | differential selection of enrollees (I13) |
| integrated plans cover drugs that reduce medical costs (H51) | beneficiaries pay less out-of-pocket in MA plans than in SAPDs (H55) |
| MAPD plans are less likely to impose non-price restrictions (L42) | enhance enrollee health outcomes (I18) |
| risk-adjustment errors in Medicare Part D (I18) | confound analyses (C38) |