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American Economic Review: Vol. 101 No. 3 (May 2011)

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Part D Formulary and Benefit Design as a Risk-Steering Mechanism

Article Citation

Goldman, Dana P., Geoffrey F. Joyce, and William B. Vogt. 2011. "Part D Formulary and Benefit Design as a Risk-Steering Mechanism." American Economic Review, 101(3): 382-86.

DOI: 10.1257/aer.101.3.382

Abstract

Medicare Part D relies upon drug plan competition. Plans have enormous scope to design benefits and to set premiums, but they may not charge differential premiums based on risk. We use the formulary and benefit design of all Medicare prescription drug plans and pharmacy claims data to construct a simulation model of out-of-pocket drug spending. We use this simulation model to examine individual incentives in Medicare Part D for adverse selection. We find that high drug users have much stronger incentives to enroll in generous plans than do low users, thus there is significant scope for adverse selection.

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Authors

Goldman, Dana P. (Leonard D. Schaeffer Center for Health Policy and Economics, U Southern CA)
Joyce, Geoffrey F. (U Southern CA)
Vogt, William B. (U GA)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
D82: Asymmetric and Private Information
I18: Health: Government Policy; Regulation; Public Health
J14: Economics of the Elderly; Economics of the Handicapped; Non-labor Market Discrimination


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