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

Images http://www.epsilonregistration.com/ERImages/378/CM

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