Upshot extra: A little-known limitation of Medicare’s drug benefit

Many studies have demonstrated what economics theory tells us must be true: when consumers have to pay more for their prescriptions, they take fewer drugs. For some conditions — diabetes, asthma, or C.O.P.D., to name a few — certain drugs are necessary to avoid more costly care, like hospitalizations.

My Upshot post today is based on this principle. It is about a little-known limitation of Medicare’s drug benefit. In particular, stand alone drug plans cost the Medicare program hundreds of millions of dollars per year because they have no financial incentive to avoid hospitalizations.

A study by economists Amanda Starc, of Northwestern’s Kellogg School of Management, and Robert Town of the University of Texas, asked how much more stand alone plans would spend on drugs if they accounted for the offsets from savings on non-drug health care. The answer: 13 percent. In covering drugs less generously, they end up costing traditional Medicare $475 million per year. This does not account for other social costs, like the inconvenience and suffering of beneficiaries who land in the hospital.

Click through to my Upshot post for more.


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