“Attribute Substitution in Early Enrollment Decisions into Medicare PDPs,” Frakt, Pizer (2007)
A few years ago my colleague Steve Pizer and I were funded to study new plan options that became available to Medicare beneficiaries in 2006, chief among them stand-alone prescription drug plans (PDPs). PDPs quickly became the most popular means within Medicare for beneficiaries to obtain drug coverage (the other option being Medicare Advantage plans that offer drug benefits). However, PDPs were not uniformly more popular. There was (and is) some geographic variation in their popularity.
We were interested in understanding what factors were associated with geographic variation in PDP enrollment. That is, why were PDPs more popular in some regions than in others? Standard economics models to investigate such a question would include measures of price (premium), competition, and demand and supply factors. We developed such a model and then did something a little unusual.
On a lark, we threw in the percent of a county’s electorate that voted for Bush in 2004. Interestingly, this turned out to be very strongly and positively correlated with proportion of beneficiaries in a county who enrolled in a PDP. Why would this be? For an answer (or a hypothesis really) we turned to behavioral economics and wrote up the results in a 2007 Health Economics paper titled “Attribute Substitution in Early Enrollment Decisions into Medicare Prescription Drug Plans.”
The key notion from behavioral economics upon which our hypothesis hangs is that of “attribute substitution.” Attribute substitution is a form of intuitive thinking in which readily accessible attributes of an object are used as proxies for the less accessible attributes relevant to a rational decision. In the case of PDPs, we hypothesized that beneficiaries might have substituted the recommendations of respected political leaders for the less accessible calculations of expected financial values of Medicare plans.
To put it bluntly, perhaps some beneficiaries heard Bush and others in his Administration touting the benefits of the new drug plans. Finding it otherwise difficult to make their own independent assessment of the relative merits of various coverage options, beneficiaries may have substituted officials’ enthusiasm for PDPs for their own prediction of its benefits. That’s a type of shortcut many of us make: we rely on the “expert” advice of others we trust rather than do our own analysis. In this case, there is geographic variation of degree of trust in the Bush Administration, which we operationalized as proportion of 2004 Bush vote.
We found that elasticity of PDP enrollment with respect to the Bush vote to be 0.14 (a 10% change in Bush vote is associated with a 1.4% change in PDP market share). To obtain a sense of the relative importance of this effect, we calculated the change in PDP enrollment due to a one-standard deviation change in each of the independent variables in our model separately. We found that the effect of the Bush vote is larger than the effect of other variables that are generally accepted to be important and relevant factors associated with enrollment decisions: premium, level of beneficiary educational attainment, county urban/rural status, provider density, income, and diagnosis based risk score.
So, an administration’s enthusiasm and popularity can have a significant impact on the early response to a new program. That’s a fairly intuitive result, and it is nice to see it is supported by the data. This paper was an interesting walk through a small tract of behavior economics. It is something I’d like to pursue further but not something for which I’m funded. So it will likely be a long time before I try anything like this again.
“Predicting Risk Selection Following Major Changes in Medicare,” Pizer, Frakt, Feldman (2008)
In 2006 stand-alone prescription drug plans (PDPs) became a new source for prescription drug coverage for Medicare beneficiaries. PDPs weren’t just new to Medicare, they were a new type of insurance product in general. No such thing had previously existed in the commercial market. Since level of prescription drug use is relatively easy for an individual to predict there was good reason to worry that PDPs would fail due to severe adverse selection. In a paper by Steve Pizer, me, and Roger Feldman we predicted the likely selection experience of PDPs and found that they could weather the degree of adverse selection they would experience (Pizer, Frakt, Feldman. (2008). Predicting Risk Selection Following Major Changes in Medicare. Health Economics 17(4).)
Some background is warranted to explain the paper’s findings in detail. Adverse selection occurs when an insurance product is purchased by individuals who are on average more risky than expected. The insurer sets the product’s premium based on the expected level of risk (expected claims). If actual risk of those who purchase the product is higher (adverse selection), the product is at risk of failure since it does not have enough revenue to cover claims.
Adverse selection is the reason stand-alone drug plans didn’t exist before. Prescription drug use is not like use of other health services in that it is very predictable. Individuals generally know their pattern of drug use much more accurately than they know if they’ll be hospitalized, for example. Therefore, to insure the expenses of drug use is a dangerous game. It is very likely that only individuals with high expected use will purchase stand-alone drug coverage. The insurer will experience adverse selection, raise its premiums in response, thereby driving out the relatively lower risks, and experiencing selection more adverse. This is the classic insurer death spiral.
For this reason, Medicare’s drug program (Part D) includes a variety of measures that reduce the amount and consequences of adverse selection. One is a late enrollment penalty. Others include risk adjustment, risk sharing, and reinsurance. In addition, PDP premiums are subsidized at a rate of 74.5% (of basic coverage, not including enhancements), making a PDP a good value even for beneficiaries with relatively low drug use.
In the paper, we predicted that PDPs would experience adverse selection. In fact, drug expenditures for PDP enrollees were predicted to be 78% higher than those for Medicare HMO enrollees. However, we also found that the PDP market would likely be able to absorb the degree of adverse selection that we predicted they would experience: on the whole the PDP market will be stable. Death spirals, if they occur, are likely to be seen only for plans that offer extensive enhanced benefits (such as the Humana Complete plan that entered the market in 2006 with full brand name coverage in the gap–it subsequently raised premiums and dropped brand name gap coverage.)
Careful readers may have noticed that I used terms like “predicted” and “likely” in the foregoing paragraph. Why didn’t we use actual enrollment to see what plan selection experience has been? We couldn’t. The data weren’t available at the time of the study. Moreover, they’re still not available. The only way to estimate PDP selection experience is to simulate it based on models of beneficiary decision making among other plan types for which data are available. That’s precisely what we did.
Using Medicare Current Beneficiary Survey data, we developed a model of Medicare beneficiary insurance decisions based on plans that existed in 1998-2001. Those plans include HMOs, Medigap supplements, and traditional fee for service (FFS) Medicare. The characteristics of choices available today are included among the choices that existed in 1998-2001, only mixed up in different ways. That is, there were choices then (HMOs) and now (still HMOs) that restrict provider choice. There were choices then (FFS, Medigap+FFS) and now (FFS, FFS+PDP, FFS+Medigap+PDP) that do not restrict choice. There were choices then (some HMO and Medigap plans) that offered drug coverage and the same is true today (some HMOs and all PDPs).
By estimating beneficiary response to the characteristics of options in 1998-2001 it is possible to predict their response to new options with the same characteristics bundled differently. That’s, more or less, what we did in the paper. Someday, when the data are (finally) available, we’ll be able to re-estimate our model and see the extent to which predictions of beneficiary decision making differ in the pre- versus post-Part D era.
“Controlling Prescription Drug Costs,” Frakt, Pizer, Hendricks (2008)
This post summarizes a 2008 article I coauthored with Steve Pizer and Ann Hendricks titled “Controlling Prescription Drug Costs: Regulation and the Role of Interest Groups in Medicare and the Veterans Health Administration” (Journal of Health Policy, Politics and Law 33(6), December).
Federal statute authorizes private plans offering a drug benefit under Medicare to negotiate with drug manufacturers for volume discounts, and it prohibits Medicare as a whole from doing so. While the prohibition on direct negotiation by Medicare has received considerable attention there is another important limitation imposed by law on the administration of the Medicare drug benefit: a minimum number of drugs in each class must be included on formularies (some classes must be open to “all or substantially all” drugs on the market).
Some have pointed out, correctly in my view, that providing Medicare the authority to negotiate directly with manufacturers would not lead to price reductions on its own. To achieve savings Medicare would also need the ability to exclude drugs from its formulary. This ability to tighten the formulary would provide the leverage to negotiate bargains.
Medicare’s inability to negotiate prices and to freely restrict drugs from its formulary is in stark contrast to another large public provider of prescription drug benefits, the Veterans Health Administration (VA), which negotiates directly with drug manufacturers and obtains very low prices.
This raises two interesting questions. First, why is Congress comfortable with the VA prescription drug benefit but not willing to authorize something similar under Medicare? Second, given the limitations on Medicare, is there a lower-resistance path to getting VA-like drug prices for more Medicare beneficiaries? Both questions are addressed in our “Controlling Prescription Drug Costs” paper, and the answer to the first question suggests one to the second.
The paper explains the differences between the two drug benefit designs by observing that Congress acts as an agent for multiple interest groups. We conclude that important limitations on the Medicare drug benefit probably arose from the advocacy of drug manufacturers and retail pharmacies, among others. Relative to Medicare policy, these interest groups are less involved in VA policy.
This suggests a practical approach to reducing the cost of providing a prescription drug benefit. A drug program that is more directly under the VA’s purview but that builds on the financing structure of the new drug-only Medicare plans may not immediately arouse the kind of effective interest group opposition that typically restricts the options of Congress with respect to Medicare. Moreover, a drug program of this kind is likely to receive the combined support of Medicare and VA beneficiary advocacy groups, which increases the political cost to opposition relative to policy proposals that receive the support of only one or the other of these groups. We develop this idea in more detail and show that a combination of VA and Medicare could achieve improved access and lower costs for some Medicare-enrolled veterans.
In particular, a VA-Medicare prescription drug plan (PDP) could be made available to certain Medicare-enrolled veterans. Such a plan has the potential to provide a rich drug benefit to a large number of beneficiaries. Of the 43 million Medicare beneficiaries, about 10 million are also veterans. While about 3 million Medicare-eligible veterans already receive drug and nondrug benefits from the VA, the rest do not. A VA-Medicare PDP would be another prescription drug coverage option for these beneficiaries, one that likely would be more comprehensive and less costly than any other available to them.
The VA-Medicare PDP discussed in the article would offer advantages to both programs and beneficiaries. Much as Medicare currently subsidizes private drug plans (whether employer offered or individually purchased), Medicare could subsidize the VA-Medicare PDP on a per-beneficiary basis. These funds would permit the VA to broaden the numbers and types of veterans it serves. Since the VA receives steeper discounts for prescription drugs than Medicare drug plans do, the per-beneficiary subsidy could be set lower than for private plans, producing savings to Medicare.
A VA-Medicare PDP would not be implemented without challenges, which are acknowledged and explored in the article. Of course, above all, it is political considerations that make prospects for this kind of integration uncertain.
What High-Risk Pools Are Good For
High-risk pools have come up again (see Ezra Klein and Jonathan Cohn). Their best application may be as a transitional measure, to fill the gap between health reform passage and full implementation. In this regard, the House health reform bill has the right idea.
Under the House bill subsidies for a national high-risk pool for the medically uninsurable would be established immediately and patch a hole in the safety net, remaining in place until 2013 at which point pre-existing exclusion restrictions would be abolished. As explained by Timothy Jost, this high-risk pool
would cover persons who are not eligible for Medicaid, Medicare or SCHIP and who have been uninsured for six months or more, or who have been denied coverage or been offered limited or unaffordable coverage because of a preexisting condition. … Premiums could cost up to 125% of the prevailing rate for individual coverage in the market and deductibles of up to $1500 and out-of-pocket limits of up to $5000 individual/$10,000 family could be imposed, so the coverage would not be a bargain.
As I wrote last month about a similar provision in the Senate Finance bill, at least in concept, if not in detail, this is a sensible plan. First, outlawing pre-existing exclusion restrictions is the right thing to do. But it can’t be done overnight. It will take time to implement this and other insurance reforms and to allow for the individual insurance market and exchanges to develop. Therefore, it is sensible to provide some transitional assistance for individuals who are in desperate need of health insurance coverage but who cannot obtain it (the medically uninsurable).
My own research on high-risk pools makes a few important contributions. In 2000, high-risk pool enrollment was a small proportion of the number of medically uninsurable individuals: 8% nationally, with state variation between 1% and 54%. Recent reports suggest not much has changed in this regard. So, high-risk pools are making a dent, but only a small one. The main limitation to greater enrollment is low funding. Some states cap enrollment due to limitations of funding. And premium subsidies are, of course, subject to funding limitations.
The paper’s main policy conclusion was that an injection of federal funds, accompanied by appropriate regulation, could dramatically increase the affordability of high-risk pool plans and provide much needed assistance to medically uninsurable individuals. This appears to be exactly what the House leadership intends to do.
High-Risk Pools and Health Reform
High-risk pools have received brief mention in the media lately. They were included in a bipartisan nod by Obama and are part of the Senate Finance Committee’s transitional plan toward universal coverage. Having participated in a study on high-risk pools and published a paper on it (Health Care Financing Review, Winter 2004-2005, with Steve Pizer and Marian Wrobel), I know a bit about them.
Scott Hensley of NPR explains that that under the Senate Finance Committee’s plan, until 2013 insurance companies could still deny coverage based on pre-existing conditions. Individuals uninsured for six months for this reason would be eligible for coverage through state high-risk pools, which would be subsidized with $5 billion in federal funding. This is a transitional measure, and by 2013 pre-existing exclusion restrictions would be illegal. My interpretation of language in the Chairman’s Mark (bottom of page 2) is that plan premiums would be subsidized so that participants paid no more than a healthy individual would.
At least in concept, if not in detail, this is a sensible plan. First, outlawing pre-existing exclusion restrictions is the right thing to do. But it can’t be done overnight. It will take time to implement this and other insurance reforms and to allow for the individual insurance market and exchanges to develop. Therefore, it is sensible to provide some transitional assistance for individuals who are in desperate need of health insurance coverage but who cannot obtain it (the medically uninsurable).
Second, high risk pools already exist in 35 states and can be set up in the other states relatively quickly. Where they exist they’re already designed to accommodate individuals with substantial medical needs. Many, if not all, include participation of patient advocacy and consumer groups. In short, if one is looking to quickly assist the medically uninsurable, leveraging existing high-risk pool organizations is a good way to do it.
Third, directing funds toward coverage of those otherwise medically uninsurable is an efficient use of taxpayers’ dollars. It steers the money and the benefits toward individuals who need it most.
What about that six month waiting period? Presumably it is included to avoid crowd-out of unsubsidized plans. The concern, no doubt, is that people who aren’t really uninsurable will cause themselves to appear so in order to obtain subsidized coverage from the high-risk pool. Therefore, forcing individuals to be uninsured for six months before eligibility for high-risk pool coverage protects the pool from gaming, albeit at the expense of additional suffering by those who badly need the coverage.
And what does my research say about high-risk pools? The paper made the following main contributions:
In 2000, high-risk pool enrollment was a small proportion of the number of medically uninsurable individuals: 8% nationally, with state variation between 1% and 54%. So, high-risk pools were making a dent, but only a small one. Recent reports suggest not much has changed in this regard. The main limitations to greater enrollment were enrollment caps and affordability. These are really two symptoms of the same thing: low levels of funding. Some states capped enrollment due to limitations of funding. And premium subsidies were, of course, subject to funding limitations.
We estimated that high-risk pool premiums were above 25% of family income for 29% of the medically uninsurable population. That is, even when high-risk pool enrollment was possible, for a large minority of medically uninsurable individuals, it was unaffordable. We simulated the effect of lowering high-risk pool premiums to 125% of the individual market rate and found that doing so would increase enrollment by 33%.
The main policy conclusion was that an injection of federal funds, accompanied by appropriate regulation, could dramatically increase the affordability of high-risk pool plans and provide much needed assistance to medically uninsurable individuals. This appears to be exactly what the Senate Finance Committee intends to do.
“Beneficiary Price Sensitivity in the Medicare Prescription Drug Plan Market,” Frakt, Pizer (2009)
This is part of an occasional series of posts on my academic publications. I’m working backwards chronologically (roughly) and will, in time, summarize all of my 15+ publications to date. All posts in the series are listed under the Journal Articles category.
Stand-alone prescription drug plans (PDPs) became available under Medicare in 2006. No similar product had existed before in any market (i.e. drug coverage separate from insurance for non-drug medical care). Therefore, it was not known how consumers would behave. What would drive their enrollment decisions? How sensitive to price (or premium) would they be?
Answers to such questions were available for more conventional health insurance products. In particular, in terms of economics jargon (which I’ll immediately unpack) it had been found that the price elasticity of demand for Medicare HMOs with respect to premium was in the -0.33 to -0.12 range. What does this mean? It means that if the premium for an average Medicare HMO goes upby 10% then the number of enrollees in that HMO is expected to go down by somewhere between 3.3% and 1.2%. (For more on elasticities see What Is the Source of Price Setting Power.)
Demand responses to price lower in magnitude than one, as is the case with Medicare HMOs, are called “inelastic.” That term suggests a low degree of responsiveness to price. Medicare beneficiaries are relatively “sticky” when it comes to HMOs. There are no systematic large flows of beneficiaries from one plan to another. Enrollees stay put, more or less.
In a 2009 paper with Steve Pizer titled “Beneficiary Price Sensitivity in the Medicare Prescription Drug Plan Market” (Health Economics), we estimated the price elasticity of demand of PDPs for the year 2007. As I said, this was something that couldn’t have been done before because PDPs didn’t exist. We found that beneficiaries were much more sensitive to premiums in the PDP market (in 2007) than they were in the HMO market. The elasticity of demand with respect to premium was -1.45. If an average PDP raises its premium by 10%, enrollment for that PDP will decline by 14.5%. Since the elasticity is over one in magnitude, this is an “elastic” response.
Why are Medicare beneficiaries much more sensitive to price in the PDP market than the HMO market? There are a number of differences between the two markets that might explain (or are consistent with) this finding. First, PDPs do not have to contract with providers (hospitals, doctors) so the cost of establishing a PDP is lower than for an HMO. This explains why there are so many PDPs available to beneficiaries (about 55, depending on location). In contrast, there are far fewer HMOs available. Some markets have none. A big market might have a dozen. With so many PDPs relative to HMOs, there are more products that are similar to one another (or substitutable). Therefore, beneficiaries are more sensitive to price because they can be. They can find similar products much more easily in the PDP market than the HMO market.
Second, PDPs are relatively new products, and beneficiaries may not have yet established strong ties to specific plans. Hence, beneficiaries in the PDP market are more sensitive to all product characteristics, including premium, than are enrollees in the Medicare HMO market.
Finally, one can switch PDPs without changing doctors. That may not be so for an HMO. If your doctor has contracted with HMO A and not B and you switch from A to B you’ll have to find another doctor. That tends to lock beneficiaries into HMOs but is not a concern for PDPs.
It will be interesting to see if the price elasticity of demand for PDPs changes over time, perhaps moving closer to that for HMOs. This is what one would expect as the market matures and beneficiaries establish relationships with specific products and firms. For the reasons described above, however, I would not expect the PDP elasticity to ever be as low in magnitude as the one for HMOs. The products are just too different and so are the markets in which they compete, at least right now.
MA Cuts: Now with Economic Wonkery
Commenters all over the blogosphere are not understanding consumer surplus and how it relates to my finding (again, with Steve Pizer and Roger Feldman) on Medicare Advantage (MA). So, let me explain it.
I stated that, according to our work, the increase in benefits from MA plans since 2003 is valued by beneficiaries at 14 cents per federal dollar spent on them. Then I said the other 86 cents in part pays for the cost of those benefits. Some people have claimed this is a contradiction. It is not.
The 14 cents is consumer surplus (which is explained elsewhere on this blog). There are two interpretations that may help:
- Beneficiaries would be no worse off receiving the 14 cents in cash instead of the extra MA benefits.
- Beneficiaries would be willing to spend only 14 cents for the extra MA benefits they receive. (In both cases “extra” here means beyond those provided in 2003.)
Meanwhile it really does cost the government $1. That other 86 cents is not a benefit, in the consumer surplus sense.
This is straight forward, standard, well established, vetted, and accepted economics. It could not have been published in the journal in which it appeared if this were not the case.
Medicare Advantage Cuts: Once More with Feeling
Abstracting from the economics wonkery a bit, let me put research findings on Medicare Advantage (MA) payments plainly.
Payment to MA plans has gone way up since 2003. Did the payment increase largely benefit beneficiaries or not? This is a current political and policy debate, about which much has been written in the media (both traditional and blogospheric). It turns out the answer is known and quantifiable. My work (with Steve Pizer and Roger Feldman) shows that for each additional dollar spent by the federal government (taxpayers) on the program since 2003, just $0.14 of it can be attributed to additional value (consumer surplus) to beneficiaries (see also: findings brief).
What do we make of the other $0.86? That goes to the insurance companies but doesn’t come out “the other end” in the form of value to beneficiaries. In part it is accounted for by the costs of the additional benefits and in part it is captured as additional insurer profit.
So, do higher MA payments produce little value to beneficiaries, as Obama claims, or are the benefits they fund important to maintain, as Republicans would have us believe? The balance of the evidence is on Obama’s side. In fact, it is a landslide: for each dollar spent, 14% of the value reaches beneficiaries and 86% of it goes elsewhere (profit or cost).
Cuts to MA should be a no brainer.
“Payment Reduction and Medicare Private Fee-for-Service Plans,” Frakt, Pizer, Feldman (2009)
This is the first of an occasional series of posts that summarize my academic journal articles. This post has been cited in the 20 August 2009 Health Wonk Review, hosted by Health Business Blog.
My most recent publication is the 2009 Health Care Financing Review article Payment Reduction and Medicare Private Fee-for-Service Plans by Frakt, Pizer, and Feldman. Below is the abstract followed by an explanation of the contributions the work.
Medicare private fee-for-service (PFFS) plans are paid like other Medicare Advantage (MA) plans but are exempt from many MA requirements. Recently, Congress set average payments well above the costs of traditional fee-for-service (FFS) Medicare, inducing dramatic increases in PFFS plan enrollment. This has significant implications for Medicare’s budget, provoking calls for policy change. We predict the effect of proposals to cut PFFS payments on PFFS plan participation and enrollment. We find that small reductions in payment rates would reduce PFFS participation and enrollment; if Congress reduces payments to traditional FFS levels it would cause the vast majority (85 percent) of PFFS plans to exit the market.
As is clear from the abstract the paper is about PFFS plans, which are a particular type of MA plan. In brief, MA plans are private Medicare plans (mostly HMOs) that receive payment from the government to provide benefits to Medicare beneficiaries. PFFS plans are a type of MA plan but they are not like HMOs: they do not have to set up provider networks and they pay providers on a fee-for-service basis using the traditional Medicare fee schedule.
PFFS plans are the closest thing to direct privatization of traditional Medicare. To a good approximation you can think of them as private organizations that get paid to do what the government already does. For more background reading on MA and PFFS plans see my prior post Medicare’s Structure and Payment Systems, Part II: Medicare Advantage.
The article makes two main contributions. The first is a 2001-2009 time series of Medicare payments to MA and PFFS plans relative to the average cost of a beneficiary enrolled in traditional FFS Medicare. To the authors’ knowledge such a time series had not yet been provided elsewhere (it is a non-trivial exercise to compute this time series in a consistent manner).
The time series is shown below (click to enlarge). It reveals that, relative to FFS costs, payments to MA (thin solid line) and PFFS plans (dashed line) have been above one in all years and particularly high since 2004. Subsequent to the increase in payments since beginning in 2004, enrollment in PFFS plans increased dramatically (thick solid line). (There is a technical detail pertaining to a change in payment methodology beginning in 2006. That’s why the term “benchmark” (or “B’mark”) is used in the figure. Roughly speaking you can interpret this as the payment to plans. More accurately it is the maximum possible payment.)
To make it explicit, that MA or PFFS payment relative to FFS costs is above one means that it costs Medicare (and taxpayers) more to cover the care of a beneficiary enrolled in an MA plan than in traditional FFS. The extra payment to MA plans is supposed to be used to provide coverage more generous than that available under FFS Medicare and at least some of it does since MA benefits are richer and cost sharing lower than FFS Medicare.
But why are are taxpayers paying private plans more to do a job that has traditionally been done by the federal government for lower cost? Of course the answer is “politics.” There has been an effort to expand the role of private plans in Medicare, in particular attracting them to rural areas with payment rates higher in proportion to FFS costs relative to non-rural areas. In rural areas provider networks are costly or impossible to set up due to the lower density of providers. Since PFFS plans are not required to establish provider networks they have disproportionately thrived in rural areas (relative to other MA plans). Hence, PFFS plans are the costliest plan type, relative to FFS. This is widely known and the article makes the point again with a 2001-2009 time series.
The second main contribution of the paper is to illustrate with a simulation what might happen if payments to private plans are cut, as has been proposed by MedPAC, CBO, and others. After estimating a model of PFFS participation in Medicare using public data, my co-authors and I simulated the effect of implementing payment parity (payments at 100% of FFS cost). We find that such a policy would nearly wipe out PFFS plans, reducing their participation by 85%.
This degree of payment reduction appears to be the direction the Administration and Congress want to go. Of course they won’t just cut payments to PFFS plans but to all of MA. Many beneficiaries will lose the generous coverage they currently enjoy under the program, but taxpayer dollars will be saved (or, rather, redirected into health reform).
Subscribe
