Perverse Incentives in the Medicare Prescription Drug Benefit

20 Pages Posted: 22 Apr 2006 Last revised: 15 May 2010

See all articles by David McAdams

David McAdams

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)

Michael Schwarz

Yahoo! - Yahoo! Research Labs; National Bureau of Economic Research (NBER)

Date Written: February 2006

Abstract

We analyze some of the perverse incentives that may arise under the current Medicare prescription drug benefit design. In particular, risk adjustment for a stand-alone prescription drug benefit creates perverse incentives for prescription drug plans' coverage decisions and/or pharmaceutical companies' pricing decisions. This problem is new in that it does not arise with risk adjustment for other types of health care coverage. For this and other reasons, Medicare's drug benefit requires especially close regulatory oversight, now and in the future. We also consider a relatively minor change in how the benefit is financed that could lead to significant changes in how it functions. In particular, if all plans were required to charge the same premium, there would be less diversity in quality but also less budgetary uncertainty and less upward pressure on drug prices.

Suggested Citation

McAdams, David and Schwarz, Michael, Perverse Incentives in the Medicare Prescription Drug Benefit (February 2006). NBER Working Paper No. w12008. Available at SSRN: https://ssrn.com/abstract=881242

David McAdams

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States
617-253-1306 (Phone)

Michael Schwarz (Contact Author)

Yahoo! - Yahoo! Research Labs ( email )

Sunnyvale, CA 94089

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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