Frakt AB (VA Boston Healthcare System), Pizer SD
(VA Boston Healthcare System)
Since January 2006, all Medicare beneficiaries have had access to prescription drug benefits under Medicare. This study explored patterns of enrollment into the most popular type of Medicare drug plan: stand-alone prescription drug plans (PDPs). In particular, we estimated the degree to which Medicare beneficiaries are sensitive to PDP premium in making enrollment decisions.
This was a retrospective study of secondary data. We conducted descriptive and multivariate analysis of 2008 Medicare administrative data that describe PDP availability, enrollment, and benefits.
Our estimate of PDP elasticity of enrollment with respect to premium (-1.45) is larger in magnitude than has been found in the Medicare HMO market.
That our premium elasticity is larger than those estimated previously in the Medicare HMO market is not surprising. The PDP market has a large number of entrants due to the low fixed costs of entry. PDPs do not have to establish provider networks, as Medicare HMOs or employer-sponsored plans do. Consequently, it is more likely that a beneficiary finds a larger number of products suitable to his needs in the PDP market than in other health insurance markets (i.e., a lower degree of differentiation). Therefore, such a beneficiary is naturally more sensitive to price. In addition, PDPs are relatively new products, whereas HMOs have existed in Medicare for many years. If Medicare beneficiaries do not readily switch insurance products (i.e., they are “sticky”), then one would expect greater price sensitivity for new products than for established ones.
Our findings are consistent with the possibility that PDP market power, and not just premium, plays a significant role in beneficiary enrollment decisions. Therefore, despite the higher relative cost, veterans may be attracted to a Medicare PDP and choose to receive fewer prescriptions from the VA. Implications for quality of care and outcomes are topics of ongoing research.