Potential for adverse selection for the new Medicare drug benefit
- Presenter:
Chair: Carole Gresenz; Discussant: Steve Zuckerman Wed June 7, 2006 8:00-9:30 Room 235
Rationale: Enrollment in the new drug benefit program is voluntary for most Medicare beneficiaries. Such voluntary enrollment is often associated with concern over adverse selection.
Objectives: This paper first explores the potential for adverse selection through an assessment of the likely proportion for which enrollment in the new Medicare drug plan will be mandatory. This is followed with a study of the insuring habits of older people who already use prescription drugs regularly.
Methodology: Medicare beneficiary data is employed to estimate the proportion of recipients for whom enrollment in the new drug plan is voluntary. This represents the size of the population for which adverse selection is a valid concern. Data from the Health and Retirement Survey (HRS) is then used to analyze the insurance purchasing habits of people who take prescription drugs regularly. While HRS does not have information on the new drug insurance product, it does have information on the other insurance decisions, including the level of Medicare supplemental insurance, life insurance and long-term care insurance. An analysis relates the propensity to insure with prescription drug use. This study draws on theories relating individual risk preference to medical history.
Results: Medicare recipients who use prescription drugs regularly are more likely to purchase higher levels of Medicare supplemental insurance and are more likely to own long-term care insurance policies.
Conclusions: The higher propensity of routine prescription drug users to insure in other areas is likely to carry forward under the new Medicare drug benefit. As such, voluntary Medicare drug plan enrollment will likely be skewed towards those who use more prescription drugs than average, bringing fears of adverse selection to fruition. As with other forms of health insurance, success for insures may be primarily a function of avoiding adverse selection.
