TAYLOR MELANSON
Providing Prescription Drug Coverage to the Elderly: America’s Experiment with Medicare Part D
By Mark Duggan, Patrick Healy, and Fiona Scott Morton
History of Medicare Part D
Medicare did not cover drugs (1966-2006)% of healthcare costs accounted for by drugs
4.5% – 1982 5.6% – 1994 10.1 – 2005
Prior to Part D, 30% of 44 million beneficiaries lacked coverage for drugs (Neuman et al., 2007)
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 Took effect in 2006 -> Established Part D 2007 – covered 24 million people, cost $39 billion
Why Study Part D?
Impact on health and economic well-beingIncrease in government spending“Attempt to use market mechanisms in the
delivery of a large-scale entitlement program” (70) Competition Price negotiation Preference matching
Coverage Plans
Stand-alone plansBasic plans
Government defined standard “actuarially equivalent”
Many options 4% of plans cover more than half of enrollees
Standard Cost Sharing Scheme
Monthly premiumDeductible = $275Low cost coverageDonut holeCatastrophic coverageOnly 17% of plans
Coverage of Medications
Basic Plan coverage - $1676 + catastrophic coverage
Formularies Tier system Prior authorization Step therapy Off formulary drugs
Choice of Plan
Out-of-pocket costFormulary status of current drugs
Maintenance vs acute need drugsReputationIncentive to enroll early
Incentivizes alternative plans2008 - 10% of eligible people did not enroll
Influence on Drug Prices
Formulary placementIncentives for patients and pharmaciesAverage price of drugs declinedTreatments without substitutes
CMS required coverageProtected Classes
Incentives for Sponsors
Firms make bid to CMSBase beneficiary premium
Incentives to make bid accurateRisk factor adjustment
Offsets approximately ¼ of variance in drug spending Plans have better data than government
Catastrophic coverageRisk absorption
Issues
Enrollees without financial incentivesCatastrophic coverageFormulary manipulationInefficient treatment patternsImpact on budget
Conclusions
Successes Drug prices Drug utilization Costs
Failures Suboptimal choices Treatments without substitutes Administrative costs Unsuccessful incentives
Citations
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