Unbiased Analysis of Today's Healthcare Issues

Optimal Choices of Medicare Part D Plans

Written By: Jason Shafrin - Nov• 01•11

Are elderly Medicare beneficiaries able to choose Part D health plans optimally?  Many researchers may believe the answer is no.  Certain elderly individuals  (e.g., those with Alzheimer’s) may be cognitively impaired.  Inertia is also a problem; switching plans is mentally taxing and involves a spending a significant amount of time researching plan alternatives.

Nevertheless, a paper by Ketcham et al. finds that Medicare beneficiaries do learn from their mistakes and can decrease over spending over time.  The Medicare Part D program began in 2006.  The authors estimate that in that year, individual overspending was $547 (overspending is the difference in beneficiary out-of-pocket payments and premiums between their current plan and the lowest cost plan).  By 2007, overspending dropped by about $298 to $248.6.  Further, whereas 9.8% of the sample had overspending levels of more than $1,000 in 2006, only 1.7% of the cohort reached these high levels in 2007.

A portion of this decrease was due to certain high-cost plans changing their benefit structure, but much of the change was due to beneficiaries switching plans.  Specifically, individuals with overspending levels of more than $1,000 were not only more likely to switch plans, but also more likely reduce the levels of overspending by more than individuals with lower levels of overspending.  This may be a regression to the mean phenomenon, or it could be the case that it takes a high level of overspending for individuals to spend the time researching plans to switch their PDP.

How did this reduction in overspending occur?  CMS’s planfinder website may have improved the information available to beneficiaries.  The site itself may have improved or more beneficiaries may have been made aware of it.  Also, the children of Medicare beneficiaries may have been more active in choosing plans for their parents.  For instance, individuals newly diagnosed with Alzheimer’s saw a decrease in overspending; this result is likely due to children helping their parents choose better PDP.

Additionally, high spending rates may provide the impetus to change plan.  Consider a model where individuals do not change plans unless their premium + OOP spending exceeds a certain threshold.  Once this threshold is met (which could differ by individual), they search for lower cost plans.  If the threshold were not met, individuals would decide that searching for a new plan is not worth the smaller savings.  In this model of behavior, one question is whether switchers (who generally have higher initial levels of overspending) tend to choose average plans (which would reduce overspending) or one of the best plans (which would decrease overspending even more).  The quantitative results of the paper seem to indicate the latter.

The conclusion of this paper: markets may not work perfectly—especially at first—but over time learning occurs and individual self-interest can more markets towards a more efficient equilibrium.

Data

The data used come from the CMS planfinder and CVS Caremark claims data from 2006-2007.  Thus, the study focuses only on the 71,399 individuals who enrolled in a prescription drug plan (PDP) managed by CVS Caremark.  Beneficiary health is measured using Ingenix Pharmacy Risk Group (PRG) variables that consist of indicator variables identifying whether the beneficiary took drugs for specific clinical indications.

Source:

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4 Comments

  1. […] Additionally, high spending rates may provide the impetus to change plan.  Consider a model where individuals do not change plans unless their premium + OOP spending exceeds a certain threshold.  Once this threshold is met (which could differ by individual), they search for lower cost plans.  If the threshold were not met, individuals would decide that searching for a new plan is not worth the smaller savings.  In this model of behavior, one question is whether switchers (who generally have higher initial levels of overspending) tend to choose average plans (which would reduce overspending) or one of the best plans (which would decrease overspending even more).  The quantitative results of the paper seem to indicate the latter.Source: healthcare-economist.com […]

  2. I apologize if this is not 100% medical orientated comment, however I feel that the reason why we are in a recession with a severely compromised medical system, is primarily due to greed & corruption on Wall Street, and the scary reality that Wall Street controls Washington DC, and consequently the country. In my 20’s, I used to be an passionate Republican, however with the corruption and degradation of our political system, I chose to be non political, and I am practically turning into a hippie at 50. It is a sad world that we have become. Let me put it in perspective. We spend about 800 billion on the military, and that does not include the Iraq and Afghanistan wars, as they fall under different accounts. 30,000 children per DAY starve to death in the world. If you can assume that a child can be fed for $275 per month, what is the cost per year :
    (30,000 per day) x (30 days per month) x ($275 per child per month) x (12 months per year) = 3.0 Billion.
    That’s it. It probably amounts to the maintenance cost of killer drones. Reality brings tears to my eyes. What about you? Do you feel a sense of compassion or will you click the back button and carry on with your life?

  3. […] “Optimal Choices of Medicare Part D Plans” – because we’re better off that some people do think about these things, like Jason at the Healthcare Economist. […]

  4. hgstern says:

    Health Wonk Review: Olio Edition now online, and your post’s in it:

    http://insureblog.blogspot.com/2011/11/health-wonk-review-olio-edition.html

    Please let your readers know.

    And a friendly reminder to newbies and regulars alike – while we haven’t made it mandatory to give a link back, it’s the way that carnivals work best. If your submitted post has been included in an HWR issue, please remember to post about it on your blog because it helps us all.

    Thanks!

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