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Optimal Choices of Medicare Part D Plans

November 1, 2011 in Medicare, Medicare Part D | 4 comments

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.

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What most reduces adherence: increasing copayments or decreasing prescription lengths?

July 20, 2011 in Pharmaceuticals | No comments

According to this article, the answer is:

“Both policies decreased medication adherence. The days’ supply policy [decreasing the days supply of each prescription from 100 to 34 days] had a much larger effect on adherence than did the copayment increase. Total Medicaid spending declined from the days’ supply policy, but the copayment policy resulted in a net increase in Medicaid expenditures.”

If someone is very sick, the time/inconvenience cost to refill a prescription seems to be a more important factor than the out-of-pocket cost.  This is true even for the Medicaid population, which is of course made up of exclusively low income individuals.  Many economists measure the elasticity of demand with respect to price, but health economists may need to start constructing a demand elasticity measure with respect to inconvenience.

 

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Estimating the Effects of Consolidating Drugs under Part D or Part B

February 15, 2011 in Medicare Part D, Part B | No comments

Currently, most Medicare beneficiaries are able to receive coverage for prescription drugs under Medicare Part D. Some drugs, however, are still covered by Medicare Part B, which covers physician services. These drugs are generally those furnished incident to a physician’s service and are administered using durable medical equipment.

To simplify coverage policy, Medicare is considering consolidating certain drugs exclusively under either Medicare Part B or Part D. A paper from Acumen, LLC (disclaimer: my current employer) has conducted a study to simulate the financial impacts of consolidating certain drugs under either the Part B or Part D program. Their key conclusions include the following:

  • Part B and Part D per unit prices vary, affecting the financial impact of consolidation (Part D per unit drug prices are roughly 52% higher than Part B prices).
  • On average, beneficiaries lose with B to D consolidations and gain with D to B consolidations.
  • Beneficiaries in the catastrophic phase experience the opposite effect.
  • Consolidation would have a small affect on Part D plan premiums.
  • Beneficiaries currently do not react to financial incentives by substituting drugs (e.g., substituting metered dose inhalants for nebulizer inhalants, substituting pumped for injectable insulin)
  • Consolidation does not substantially increase incentives to switch Part D plans.
  • Overall, Medicare gains with B to D consolidation and loses with D to B consolidation.

Further information on the drug coverage in Medicare Parts B and D is described below.

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End of the War on Drugs?

May 11, 2010 in Current Events | 1 comment

According to Businessweek:

President Barack Obama’s plan to fight drug abuse and trafficking proposes spending $15.5 billion next year and shifting the emphasis from fighting a war on drugs to treating the problem as a national health issue, the administration’s top drug-policy adviser said in an interview.

“It’s a disease, it’s diagnosable and it’s certainly something that can be treated — but it’s not a war,” said Gil Kerlikowske, director of the White House Office of National Drug Control Policy.

Just because the President increased spending on drug treatment, however, does not mean that the war is over.  In fact, President Obama plans to increase spending on domestic law enforcement by “1.9 percent to $3.9 billion under the plan, with $579 million going to the Organized Crime Drug Enforcement Task Force.”  Plus, the U.S. still supports Colombian efforts to destroy cocaine growing plants in South America.  Drugs are still illegal and penalties for drug use–although moving gradually towards decriminalization in many states such as California–have not changed on the federal level.

Despite the rhetoric, the War on Drugs continues.

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Do Economists Support FDA Pre-approval of Drugs?

May 9, 2010 in Pharmaceuticals, Public Health, Regulation | No comments

Conventional wisdom holds that economists advocate for reducing regulation on most policy arenas.  Regulation imposes costs and businesses and is often ineffective.  Further, as technology and market conditions change, regulations which were originally welfare enhancing can now become archane.

The public generally views the FDA’s pre-approval as a worthwhile endeavor.  The goal of FDA pre-approval is to protect consumers against unsafe and/or ineffective drugs.  In the world of neo-classical economics, agents have perfect information about drug quality and the role for the FDA disappears.  Even if information is not perfectly observed, the FDA’s ability to restrict the entry of potentially useful drugs into the market can be welfare destroying.  Certifying drugs as safe rather than prohibiting them through regulations may be a preferable form of spreading information.

In a recent survey of 44 leading economists, 23 support or strongly support pre-market approval of new pharmaceuticals and devices while 15 where opposed or strongly opposed (6 were neutral).  The key rationale behind the support of pre-market approval was the problem of imperfect information and also the public goods aspect of knowledge.  Fewer economists supported the notion that the government has superior ability to assure safety and  efficacy.

The majority of economists also believe:

  • the effect of pre-market approval in suppressing would-have-been benefits is often or typically overstated in public discourse.
  • doctors do not systematically error when prescribing medicines.
  • replacing the current FDA system with a simple physician prescription requirement for new drugs and devices is a bad idea
  • The current FDA system increase the amount of knowledge available on new drugs.

Economists were split as to whether drugs approved by European, Japanese, and Canadian authorities should automatically be approved for use in the U.S.

This survey shows that economists do not have a clear consensus answer to the question of whether there is “a sound market-failure rationale for the banned-till-permitted policy for drugs and devices.“

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Irreversibility and Medical Treatment

February 25, 2010 in Economics - General, Pharmaceuticals | No comments

Irreversibility occurs when treatment in the current period alters the efficacy of treatments in the future. A paper by Zivin and Neidell (2010) give the following simple example:

Examine the following table.  In the first scenario, the individual has disease X in two periods.  If he takes treatment 1 (T1) then he will recover 6 units of health in each period; if he takes treatment 2 (T2) then he will recover 4 units of health in each period. Because 12 is bigger than 8, the person should take T1 in this case.

However, scenarios 2 shows how irreversibility may affect the optimal treatment chosen. Let us assume that the person still has disease X in periods 1 & 2, but can contract disease Y with probability p. When this disease occurs, the individual loses 8 units of health. He can be cured with only one type of treatment (TY). However, TY is only effective for patients who have not previously received T1. Thus, if there is a high probability that the individual contracts disease Y, it is likely optimal to treat patients with disease X with T2.  Irreversibility has affected the optimal choice for X, since the option value of T2 is high when the probability of contracting disease Y is large.

Real world examples include the following: “

  • “…treatment of certain types of cancer patients with a bone marrow transplant and massive doses of chemotherapy will reduce the patient’s ability to tolerate and respond to chemotherapy in the future, should some form of cancer recur.“
  • “Drugs that are subject to resistance are another example.“
  • “Indeed, these concerns may help explain why there is still no consensus about when to start therapy in HIV patients. Some advocate the ‘hit hard and hit early’ approach, which suggests the initiation of complete treatment at the time of diagnosis in order to prevent the disease from progressing. Others are concerned that starting therapy at early stages, when T-cell counts are high and viral loads are low, may lead to the development of viral resistance to these drugs and related compounds.“

Failure to consider the option value of drug treatment can make drugs that seem promising in clinical trials actually perform poorly in real world situations.

  • Zivin and Neidell (2010) “Medical technology adoption, uncertainty, and irreversibilities: is a bird in the hand really worth more than in the bush?” Health Economics, v19(2):142-153.

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Calculating zero inflation when drug costs rose from $100 to $36,000

August 23, 2009 in Pharmaceuticals | No comments

A paper by  Claudio Lucarelli and Sean Nicholson  (2009) examines the skyrocketing cost of colorectal cancer treatment.  In 1993, the price of treating these patients with chemotherapy was only $100.  By 2005, this price had skyrocketed to $36,000.  Is this what is wrong with our health care system?

The authors claim that the answer is no.  Although prices increased, so did quality.  Thus, the price per unit of quality has stayed fairly constant over time.  In the author’s words:

“Using discrete choice methods to estimate demand, we construct a price index for colorectal cancer drugs for each quarter between 1993 and 2005 that takes into consideration the quality (i.e., the efficacy and side effects in randomized clinical trials) of each drug on the market and the value that oncologists place on drug quality.  A naive price index, which makes no adjustments for the changing attributes of drugs on the market, greatly overstates the true price increase.  By contrast, a hedonic price index and two quality-adjusted price indices show that prices have actually remained fairly constant over this 13-year period, with slight increases or decreases depending on a model’s assumptions.”

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Oakland’s Creative Revenue Generator

July 23, 2009 in Uncategorized | 1 comment

California is known for beautiful beaches, Hollywood, and sublime parks.  In this post, however, I will discuss two other things for which California has recently become famous.  

  • Marijuana.  Here in California, medical marijuana is legal.  Based on my unscientific of pedestrians on a variety of U.S. regions, northern California also has the most lax enforcement of marijuana laws.  
  • Deficits.  California’s current deficit has lead to rumors of bankruptcy.  The University of California system is in a half a billion dollar hole.  Revenue shortfalls have forced California to close enrollment to its SCHIP program called Healthy Families.

In order to solve the problem of deficits, Oakland has decided to rely on marijuana to help solve its deficit problem.  Oakland has decided to institute a tax on medical marijuana.  The plan should raise about $300,000 to Oakland’s coffers.

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The American Forty Years War

July 17, 2009 in Uncategorized | 1 comment

The U.S. is currently involved with wars in Iraq and Afghanistan, but its longest running entanglement is its war on drugs.  Marketplace reports that “the war on drugs, though, has been going on for four decades. Forty years ago today President Nixon asked Congress to create a national anti-drug policy. It became the war on drugs in this speech two years later.”

Over this time period, the U.S. has spent $500 billion.  Instead of using this money to help addicts kick the habit and to educate kids about the evils of drugs use, the U.S. has been fighting  a counterproductive military cold war with drug gangs.  Rolling Stone national affairs correspondent Ben Wallace-Wells reports that, “We spend about two-thirds on buying, you know, fun toys for the Mexican and Colombian militaries and other measures — and that’s a number that’s been rising.”

Public service ads may provide insight of when we should give up the fight against the importation and sale of drugs: “Know when to say when.”

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FDA bans import of Indian Pharmaceuticals

April 28, 2009 in Pharmaceuticals | No comments

Marketplace reports that the FDA has blocked sales from one of India’s largest drug producers, Ranbaxy Pharmaceuticals.  “It prevented sales of Ranbaxy’s generic versions of the antibiotic Cipro and the cholesterol pill Zocor.”

This begs the question: should the FDA put office in foreign countries?  On the one hand, it is important to ensure that imported drugs are safe.  However, FDA decisions to ban certain drugs could be influenced by protectionist concerns rather than patient health. 

Ajay Sahai, executive director of the Federation of Indian Export Organizations: ”In many of the cases, Indian companies do have a case where they have been stopped by large companies present in the importing countries. They have tried to restrict the imports at whatever cost or citing whatever reason.”

Is the FDA doing a diligent job or protecting the safety of the U.S. drug supply, or is it engaged in protectionism.  Finding the true answer is exceedingly difficult.

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