Beneficiary Price Sensitivity in the Medicare Prescription Drug Plan Market

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The Medicare stand-alone prescription drug plan (PDP) came into existence in 2006 as part of the Medicare prescription drug benefit. It is the most popular plan type among Medicare drug plans and large numbers of plans are available to all beneficiaries. In this article we present the first analysis of beneficiary price sensitivity in the PDP market. Our estimate of elasticity of enrollment with respect to premium, -1.45, is larger in magnitude than has been found in the Medicare HMO market. This high degree of beneficiary price sensitivity for PDPs is consistent with relatively low product differentiation, low fixed costs of entry in the PDP market, and the fact that, in contrast to changing HMOs, beneficiaries can select a PDP without disrupting doctor-patient relationships. Published in 2009 by John Wiley & Sons, Ltd.

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