Beneficiary Price Sensitivity in the Medicare Prescription Drug Plan Market

Enrollees in Medicare Part-D prescription drug plans are more sensitive to differences in the price of premiums than individuals enrolled in HMOs.

Medicare Part-D added a new group of privatized prescription drug plans (PDPs) to the traditional plans offered under the Medicare Advantage program. This study examined how prices in the PDP market affect consumer (i.e., beneficiary) behavior with respect to choosing PDPs. The authors applied a previously developed utility logit model to public use data from the Centers for Medicare and Medicaid Services (CMS). They subtracted low-income subsidy (LIS) beneficiaries from analysis of the PDP market because LIS beneficiaries pay little or nothing for premiums. Statistical models assumed that individuals receiving benefits through employee-sponsored plans were not in the market for PDPs.

Key Findings:

  • Consistent with characteristics of the PDP market, two stage least-square regression analysis (2SLS) yielded a premium elasticity for PDPs that was greater than estimates of elasticity for drug plans offered through HMOs.
  • Ordinary least square estimation (OLS) and 2SLS models confirmed that premiums are endogenous.

This is the first study to present analysis of beneficiary price sensitivity in the PDP market. The authors also provide a background discussion of PDP market characteristics.