Stuart, B. (PI), and Terza, J. "Medicare Beneficiary Response to Benefit Gaps Versus Actuarially Equivalent Continuous Coverage for Prescription Drugs." The Robert Wood Johnson Foundation, HCFO (2006-2007) $153,762.

Description

Medicare Beneficiary Response to Benefit Gaps Versus Actuarially Equivalent Continuous Coverage for          Prescription Drugs

Project Officer: Deborah Rogal

The complex design of the Medicare Part D drug benefit raises the question of how beneficiaries will react when faced with cost sharing that changes with the level of prescription spending. Based on recent research sponsored by the Robert Wood Johnson Foundation ("Establishing the Value of Stable Prescription Coverage for Medicare Beneficiaries," HCFO grant #P402), we have demonstrated that gaps in drug coverage lead to reduced utilization rates and that the effects of magnified for Medicare beneficiaries with common chronic diseases such as diabetes, COPD, and mental illness likely cut back on their medications if and when they reach benefit gaps in the standard Part D benefit. The most significant benefit gap is the so-called "donut hole" between $2,250 and $5,100 in out-of-pocket spending under the statutory Part D Plan. However, because prescription drug plans (PDPs) and full-service Medicare Advantage plans may offer design variations that are actuarially equivalent to the standard benefit, the recipient population is likely to face a gamut of design features that include benefit gaps of various duration.

The project has two aims. First is to formally asses the prevailing hypothesis that actuarially equivalent but structurally different cost sharing arrangements have similar effects on beneficiary prescription drug utilization patterns. There is a large literature devoted to understanding the responsiveness of pharmaceutical demand to price signals, but none that directly compares actuarially equivalent benefit designs. Our working hypothesis is that gaps in coverage will reduce utilization rates more than actuarially equivalent continuous benefits given the potential dislocation in prescribing regimes during gap periods and the added difficulty in financial planning to cover gap periods.

Our second aim is to determine if the relationship between use and benefit structure is sensitive to the overall generosity of insurance coverage. This objective gets to the heart of the question of whether beneficiaries' demand for medications is a linear function of price or whether demand becomes either more of less responsive to price changes as generosity rises. This is a critical question for policy makers and plan administrators because if demand is truly nonlinear then it means that the impact of any given cost sharing mechanism will vary depending on the overall generosity of the plan. Our work on this objective will also answer the related question of whether beneficiaries' behavior under actuarially equivalent designs varies with generosity of coverage. We hypothesize that the impact of coverage gaps as a deterrent to demand will diminish with increasing average generosity of coverage.

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