Medicare Part D Program: Prescription Drug Plan Copayment Structure and Premium Sensitivity

Since January 2006 Medicare beneficiaries have the option to purchase prescription drug benefits from Medicare under the Part D program. The addition of outpatient drugs to the Medicare programs reflects Congress’ recognition of the fundamental change in recent years in how medical care is delivered in the U.S. It recognizes the vital role of prescription drugs in the health care delivery system and the need to modernize Medicare to assure their availability to Medicare beneficiaries. The Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA) created the Medicare drug benefit and specified a standard plan. The law also enables plans to offer alternative benefit packages that are either actuarially equivalent or provide enhanced benefits above the basic benefits. A majority of these alternative plans offer multitiered formulary where different medications have different patient copayments. Different from traditional Medicare, Part D benefits are provided by private sector plans through a competitive bidding process. Firms submit a bid to the Center for Medicare and Medicaid Services (CMS) which represents the expected cost to the firm for providing basic benefits to an individual of average health. The competition between plans was expected to drive premiums down toward marginal cost, ensuring that the beneficiaries receive maximum benefits for a given public expenditure (Biles et al. 2004). This dissertation examines the stand-alone Medicare Prescription Drug Plans (PDPs) bid and premium from the following perspectives using the 2006-2008 PDP data. First, we examine the use of multiple-tier copayment structures. In particular, we tend to discover the relationship between enrollee cost sharing at each tier and prescription drug plan (PDP) bids. Bids are equivalent to the total premiums charged by an insurer. This includes the premium paid by the consumer and the portion paid by the federal government. Further, we decompose plan bid and premium changes between 2006 and 2008 into two components, the proportion due to changes in plan characteristics and the proportion due to changes in marginal price. By doing so, we estimate whether the actuarial methods used to price those characteristics play a role in explaining the plan bid and premium difference across years. Finally, we measure the Medicare beneficiaries’ sensitivity to price in the PDP market, specifically the elasticity and semi-elasticity of enrollment with respect to PDP premium