Competition Works…even in Medicare Part D

This is the finding from a CBO working paper by Stocking et al. (2014). They use measure how plan bids change as the number of plans in an area change controlling for year, region, plan sponsor fixed effects, whether the plan was a Medicare Advantage Part D Plan (MA-PD), and whether the plan has a high share of low-income subsidy (LIS) beneficiaries. The authors find the following:

Consistent with economic theory, we find that increases in the number of plan sponsors within a market were associated with lower bids and lower overhead and profits of plans in that market. [A]mong stand-alone plans…each additional plan sponsor entering [a] market was associated with a reduction in bids…of 0.4 percent…which corresponds to an elasticity of -0.071….an additional plan sponsor nationwide was associated with a reduction in government spending of $7 million to $17 million each year.

However, these are only the average results. The authors also find that the size of the incumbant and the new entrants matter.

The bids of a larger “incumbent” plan that enrolls 5 percent of the regional beneficiary pool are less responsive (elasticity = -0.01) to changes in the number of plan sponsors than the bids of a smaller “fringe” plan that enrolls less than 0.25 percent (elasticity = -0.12).

Background on Medicare Part D

Part D plan sponsors must offer a benefit package that meets certain minimum standards, as specified by the Centers for Medicare & Medicaid Services (CMS). “Defined standard coverage” has a fixed deductible ($310 in 2014), requires the beneficiary to pay 25 percent coinsurance for spending between the deductible and the initial coverage limit ($2,850 in 2014), has limited coverage when spending is between the initial coverage limit and the catastrophic threshold (called the coverage gap or “doughnut hole”), and has 5 percent coinsurance when spending exceeds the catastrophic threshold ($4,550 in 2014).

Part D plan sponsors can also offer a benefit that is “actuarially equivalent” to that coverage, meaning that the average beneficiary would expect to pay an amount equal to the cost of a plan offering defined standard coverage. That can include reduced cost sharing for some drugs on the formulary or some coverage in the coverage gap in exchange for higher cost sharing elsewhere within the benefit.

A third type of plan is the “basic alternative” plan, which also must be actuarially equivalent to the defined standard coverage but can offer a deductible lower than that in the defined standard plan in addition to lower cost sharing…

Part D plans can also offer an “enhanced” version of the basic alternative benefit package, which would contribute more toward drug spending than a plan offering the basic benefit (in exchange for a higher premium). That design could include a reduced deductible, lower copayments, an expanded formulary (list of covered drugs), or more comprehensive coverage in the gap

Each year, plans submit a bid that reflects the amount they would accept to supply the basic benefit to a beneficiary of average health in a particular region…A plan sponsor wanting to offer a nationwide stand-alone plan must submit 34 separate bids for each of the 34 PDP regions. The bids from each PDP and MAPD plan are averaged, and roughly 75 percent of that average and 75 percent of estimated reinsurance costs are included in the government’s contribution toward each beneficiary’s Part D costs. The difference between the plan’s bid and the government’s contribution is the plan’s premium, which is paid by the enrollee unless the enrollee qualifies for the low-income subsidy part of the program. Once a plan submits its bid for the upcoming year, it cannot alter the bid and must accept all enrollees at the premium that results. Because the premium is the difference between the bid for the basic benefit and the standard government contribution, it reflects the full marginal difference in bids between any two plans.

[P]lans can develop formularies to steer beneficiaries to drugs with lower costs. They do that by placing some drugs on a preferred tier with a lower copayment and other drugs on tiers with higher copayments…plans often receive lower net drug prices from manufacturers on the basis of their ability to steer beneficiaries toward particular brand-name drugs. In exchange for offering preferred placement on their formularies, Part D plan sponsors have been able to negotiate significant rebates that lower the net cost of brand-name drugs. Third, plans can encourage a shift toward the increased use of generic drugs primarily through a lower copayment for those drugs.


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