Study on Informed Choice of Drug Coverage for Medicare Beneficiaries

Grant Description: Is Medicare Part D drug benefit a cost-effective option for healthy Medicare beneficiaries? The researchers hypothesized that seniors use current expenditures to estimate their need for coverage, which could result in a significant underestimate of the true risk. The objective of the project was to evaluate the cost-effectiveness of Medicare Part D for healthy beneficiaries and provide accurate lifetime drug cost information to help seniors make more informed decisions regarding Medicare Part D coverage.

Policy Summary: Beginning in 2006, Medicare’s Part D benefit offered outpatient prescription drug coverage to beneficiaries. Medicare beneficiaries have a choice to enroll in Part D drug coverage as soon as they are eligible for Medicare, or to postpone enrollment in Part D until they contract a drug-intensive condition. Postponed enrollment saves the beneficiary the cost of premiums, but adds the cost of a late enrollment penalty if the beneficiary decides to enroll in Part D at a later date. Immediate enrollment clearly is of interest of beneficiaries who have a drug-intensive condition because premiums are not risk-rated and are subsidized heavily by the government. The enrollment decision for a healthy beneficiary is less clear. In order to make an informed enrollment decision, healthy Medicare beneficiaries must have estimates of (a) the lifetime probability that they will contract a drug-intensive condition; (b) their length of survival with the condition; (c) their expected annual drug expenditures with the condition, with and without coverage; and (d) the amount of the late enrollment penalty. Prior to this study the first three estimates were not readily available to beneficiaries. Lifetime probabilities of contracting drug-intensive conditions were available for only a few conditions. Using MCBS data from the period 1993 to 2002, the researchers combined estimates of these cost components to obtain estimated lifetime out-of-pocket expenditures on outpatient prescription drugs, premiums and late enrollment penalties for healthy 65-year-old Medicare beneficiaries if they purchase Part D as soon as they are eligible versus waiting until they contract a drug-intensive condition. The researchers found that the late enrollment penalty provides an important incentive for early enrollment. Eliminating the late enrollment penalty would create a significant cost advantage for postponed enrollment, particularly for men. We also found that the advantage of coverage for healthy beneficiaries – lower out-of-pocket costs – is offset to a degree by the increased spending that results from having prescription drug coverage (moral hazard). Our analysis provides information on only one input to beneficiaries’ Part D enrollment decisions – out-of-pocket spending. Other important factors include the beneficiary’s aversion to risk and the value they place on the additional expenditure on drug consumption induced by Part D coverage, but these factors also favor immediate purchase. The researchers’ estimates and microsimulation model provide a flexible analytic platform that could be used to simulate a variety of policy options regarding the structure of the Part D benefit.