Adverse selection in the Medicare prescription drug program

Abstract

The Medicare Part D drug benefit created choices for beneficiaries among many prescription drug plans with varying levels of coverage. As a result, Medicare enrollees with high prescription drug costs have strong incentives to enroll in Part D, especially in plans with more comprehensive coverage. To measure this potential problem of "adverse selection," which could threaten plans' finances, we compared baseline characteristics among groups of beneficiaries with various drug coverage arrangements in 2006. We found some significant differences. For example, enrollees in stand-alone prescription drug plans, especially in plans offering benefits in the coverage gap, or "doughnut hole," had higher baseline drug costs and worse health than enrollees in Medicare Advantage prescription drug plans. Although risk-adjusted payments and other measures have been put in place to account for selection, these patterns could adversely affect future Medicare costs and should be watched carefully.