“For the vast majority of seniors, the new benefit is working.”
-Mark McClellan, CMS, February 2006
"It's a disaster, Medicare Part D - D is unfortunately for disaster."
- Sen. Chris Van Hollen (D-Md.), March 2006
Medicare Drug Plan Premiums
Kosali SimonAssistant Professor,
Department of Policy Analysis and ManagementCornell University and NBER
Questions:
1)What is the relationship between premiums and generosity? 2)How has it changed 2006-2007?
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Density
0 20 40 60 80Monthly premium in 2006 dollars
Distribution of Premiums, Without Enhanced Plans
Variation in Premiums for Actuarially Identical PlansWide Variation in Premiums for “Actuarially Identical” Plans
2006: Mean $33, Standard Deviation $11
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0 2 0 4 0 60 8 0M on th ly pre m iu m in 2 00 7 d o lla rs
D is tr ib u tio n o f P re m iu m s, W it ho u t E n h a n c ed P lan s
2007: Mean $29, Standard Deviation $7
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0 50 100 150Monthly Average of Annual OOP for Random 5 from Top 100
Distribution of OOP Spending, All Coverage ZonesWide Variation in Plan Generosity (Out of Pocket Spending, 2006)
12 Minute Plan
• Basics of the market
• Hypotheses
• Why premiums (dictated by CMS) are reflective of prices set by firms
• Method
• Dataset
• Results
Medicare PDPs- Basics
• Many plans (1,429 in 2006 and 1,875 in 2007)
• 34 regional markets
• Many enrollees (16.5 M, including duals)
• Annual open enrollment
• Several comprehensive reviews– Eg Gold (2006), Hoadley et al (2006), MedPAC
(2006, 2007)
The Standard Design of Part D Drug Coverage
Deductible
Premium
ICZ
DH
Catastrophic coverage
Plans withgap coverage
Sources of Variation in Plan Generosity
• Reduction in out of pocket costs for known and unknown drug needs– Plans vary in base prices for drugs, extent of
formulary coverage, tiering, gap coverage
• Non price features– (observed to some degree) step therapy, prior
authorization, quantity limits – (unobserved) customer service, reputation
Expect a tradeoff between generosity and premium in equilibrium
Premiums
• Premiums for consumers determined after a subsidy process (average subsidy 75%, additional subsidies to low-income beneficiaries)
(Firm’s objective function is complex, SR and LR profits, eye to MA market, regional differences etc)
• Step 1: firm submits bid stating expected cost of insuring a beneficiary (with CMS ‘reinsurance’ covering 80% of catastrophic costs)
• Step 2: Also tell CMS the full cost had CMS not paid 80% of the catastrophic zone– CMS will make sure that average subsidy is 74.5% of total premium
• Step 3: Determine the beneficiary premium for that plan by formula
=>Premium will be bid minus constant, under certain assumptions
Method & Data
• Measuring generosity– Calculate an average out of pocket measure, 10 lists
for 2006, 34 for 2007– Non price: include measures of utilization hurdles,
insurer f.e.
• LHS variable: Monthly premium– Since premiums are fixed within a region, control for
regional characteristics or f.e. Correlate standard errors by insurer
• Dataset is at insurer by plan by region (1,429 observations in 2006, 1,875 in 2007)
Results
First, regressing premiums on each OOP measure, one at a time, yields positive coefficients, implying generosity and premiums negatively correlated
2007 results similar (out of 34 lists, 18 +***, 2-**, 10+, 4-)
Second, regressions separating sample by type of plan, including utilization hurdles, regional characteristics. Premium-generosity relationship seen on previous slide persists.
Results when measures other than OOP costs are used
Third set of models includes fixed effects (region, insurer) or clusters standard errors by insurer
-Region f.e. do not change results qualitatively-Insurer f.e. reverse sign significantly on most OOP measures (but not the average OOP measure)
Discussion and Conclusions
• Using several different measures of OOP drug costs generosity is initially not positively related to premiums– Models estimated using within-insurer variation shows
expected tradeoff
• Possible reasons– Risk reduction mechanisms, ulterior motives, complex long
run objective functions
• Implications– Are plans that cost more relative to generosity driven out of
the market?– What is the generosity-premium relationship when taking
enrollment into account?