Plan selection in Medicare Part D : evidence from administrative data

We study the Medicare Part D prescription drug insurance program as a bellwether for designs of private, non-mandatory health insurance markets that control adverse selection and assure adequate access and coverage. The focus of this paper is on the ability of consumers to evaluate and optimize their choices of plans, an essential ingredient if adequately regulated private health insurance markets are to be successful in allocating health resources efficiently. We use administrative data on medical claims in Medicare Part D. These data provide us with detailed and reliable information on health conditions and prescription drug use, as well as information on the Pharmacy Drug Plan (PDP) an individual has chosen and her premiums and out-of-pocket (OOP) copayments for prescriptions; we term the sum of these Consumer Inclusive Cost (CIC). We can also construct the set of plans that were available to an individual when she made her decision, along with all their characteristics, including formularies and copayment tiers. Our results suggest that less than 10 percent of individuals enroll in plans that are ex post optimal with respect to total cost (premiums and co-payments). Relative to the benchmark of a static decision rule, similar to the Plan Finder provided by the Medicare administration (the Centers for Medicare and Medicaid services, or CMS), that conditions next year’s plan choice only on the drugs consumed in the current year, enrollees lost on average about $300 per year. These numbers are hard to reconcile with decision costs alone; it appears that unless a sizeable fraction of consumers value plan features other than CIC, they are not optimizing effectively. Our results then do not support the proposition that consumers will make and benefit from good choices in private health insurance markets, and direct health care resources to their best use. -- Medicare ; prescription drugs ; health insurance demand