Medicare Part D: An Analysis of the Supply Side Incentives

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Medicare is a public health insurance program for the elderly and disabled in the United States that covers over 50 million beneficiaries. In 2006, Congress expanded the program to include prescription drug coverage via Medicare Part D, generating the largest expansion of Medicare since the program?s inception in 1965. In 2012, approximately 32 million individuals benefitted from the program with a cost for the government of about $60 billion. The expansion of Medicare into Part D has generated a tremendous amount of policy interest and academic research. However, the vast majority of the literature has been focused on demand-side questions. In contrast, this project intends to examine the role of Medicare Part D?s regulations on supplier behavior. The supply side of Medicare Part D is vital to the operation of the market, as the program is centered on publicly-subsidized private delivery of prescription drug plans. This proposal consists of several closely-related projects. The first study will describe how features of the current regulations induce strategic manipulation of the premiums by the insurers and quantify how this behavior affects prices. It will use an instrumental variable empirical strategy aimed at quantifying the effect of subsidy manipulability on premium growth across the geographical regions in which Medicare Part D divides the US territory. The second study will complement this reduced-form analysis by using a structural model of supply and demand in the Part D market to evaluate prices and allocations under counterfactual policies characterized by different provisions for the subsidies paid by Medicare. The final arm of the proposal will use micro-level administrative data from CMS and a different empirical approach to study the role of adverse selection and risk-adjustment mechanisms in our preceding analysis. The proposed project is expected to generate broad impact through a number of channels. First, within the academic community, the project will help solve a few puzzles discussed in the literature on Medicare Part D and it will help connect the Health Economics and Industrial Organization perspectives on this important market. Second, the results of the project have direct implications for policy reforms that could improve how tax-financed subsidies are administered in Medicare Part D, so as to better align the supply-side incentives with the goal of the program. These insights are applicable beyond the Medicare Part D program, providing guidance to the ongoing public debate about the regulatory design of health insurance exchanges as part of the Affordable Care Act. Finally, we note that this proposal is among the only research in the economics literature that explicitly considers the low-income enrollees in Medicare Part D, an economically-disadvantaged group which is under studied.