Private Provision of Social Insurance: Drug-Specific Price Elasticities and Cost Sharing in Medicare Part D

Abstract

We explore how private drug plans set cost-sharing in the context of Medicare Part D. While publicly-provided drug coverage typically involves uniform cost-sharing across drugs, we document substantial heterogeneity in the cost-sharing for different drugs within privately-provided plans. We also document that private plans systematically set higher consumer cost sharing for drugs or classes associated with more elastic demand; to do so we estimate price elasticities of demand across more than 150 drugs and across more than 100 therapeutic classes. We conclude by discussing the various channels that likely affect private plans’ cost-sharing decisions.

Health care demand elasticities by type of service

“…Pharmacy is more elastic, at −0.44 (backward myopic) and −0.51 (forward myopic). Einav et al (2016) estimate a mean drug elasticity of −0.24 for a Medicare Part D, a population older than our sample. 10 Inpatient spending is estimated to have a statistically significant elasticity of −0.30 using the backward myopic price versus an implausible −2.35 for the forward myopic price.…”

“…Understanding how consumers react to changes in cost shares for specific services is important to understand how insurers design their health plans to control for moral hazard and to select services to offer. In that sense, our paper is similar to Einav et al (2016), which estimates demand elasticities for more than 150 pharmaceutical drugs in Medicare Part D.…”

The impact of consumer inattention on insurer pricing in the Medicare Part D program

“…For each enrollee, we estimate counterfactual costs in each plan (after discarding very small plans) holding consumption constant. Although Einav, Finkelstein, and Polyakova () have shown that moral hazard affects an enrollee's drug consumption and, in addition, an enrollee might be elastic across therapeutic substitutes when she changes plans, dealing with these issues is beyond the scope of the current article. We follow the existing literature in our calculation of counterfactual costs.…”

Estimating the Heterogeneous Welfare Effects of Choice Architecture

“…Incorporating such moral hazard into models of consumers’ PDP choices is complex. Heterogeneity in demand elasticities exists across people as well as across drugs (Einav et al., ) and even within a person across health states. Modeling such heterogeneity could potentially change the distributional effects of the policies that we analyze.…”