Essays on prescription drug benefits in Medicare managed care

Abstract

In this thesis, I estimate a structural demand model for prescription drug benefits by Medicare beneficiaries using data from the Medicare HMO program. I then use the utility parameter estimates to explore other questions of interest relating to the elderly's demand for prescription drug benefits. In Chapter 1, I study the question of how much Medicare beneficiaries value prescription drug benefits. Using data from the Medicare HMO program, I find that Medicare beneficiaries are willing to pay $33 to increase their brand-name coverage limit by $100. I also estimate marginal cost for each HMO and regress it on prescription drug benefits. I find that raising brand-name coverage by $100 costs $30. These estimates suggest that Medicare HMO enrollees are less than average prescription drug users and the results give a lower bound for the welfare derived by the elderly from prescription drug benefits. Chapter 2 addresses the question of how Medicare HMOs' choices of premiums and benefits affect selection. Changes in demographic factors (a measure of risk based on beneficiaries' characteristics) and risk scores (a measure based on beneficiaries' inpatient diagnoses) in the fee-for-service sector are regressed on changes in premiums and benefits in the HMO sector. The results show that increasing premiums and lowering benefits raise the demographic factor but have no effect on the risk score, suggesting that beneficiaries in more expensive demographic categories switch out of HMOs when premiums rise and benefits fall but these beneficiaries are healthy for their demographic category.

(cont.) Chapter 3 measures the welfare loss from the withdrawals from the HMO program following the Balanced Budget Act of 1997, using the utility parameter estimates from Chapter 1. The changes to the Medicare HMO program in the Balanced Budget Act triggered many plan withdrawals from the program. The welfare and costs are calculated under two counterfactual scenarios. The results show that the Medicare HMO program generates more welfare than costs and that the withdrawals resulted in a net loss for society. The estimates of the loss range from $4.3 billion to $16.6 billion.