Nothing for Something: Paying Twice for Drug Benefits in Medicare HMOs (Formerly 'Are There Too Many Choices in Medicare?')

Abstract

The Medicare Modernization Act of 2003 (MMA) added a new outpatient prescription drug benefit to the Medicare program for elderly and disabled individuals in the US. At the same time, it increased payments to private health plans to induce more plan participation in Medicare. We develop a theoretical model to clarify the benefits to beneficiaries of these two expansion paths and then estimate a nested logit model of plan choice that allows us to quantify these benefits. We find that the addition of standardized drug benefits produces 2.4 times more value per government dollar than an increase in payments to plans. produced es as much value for each dollar of government spending as the expansion of private plan choices. The primary reason for this lopsided benefit-cost ratio is that most private plans in Medicare were already providing drug coverage in counties where they operated. Essentially, the government has decided to pay private plans twice for the same benefit. We estimate that approximately US$43 billion will be spent over the next 10 years to expand choices with little value to beneficiaries. We suggest that modified bidding procedures in which private plans bid to provide both standard Medicare benefits and drug coverage, could reduce this spending.

Keywords: Medicare, drug benefits, consumer surplus

JEL Classification: I10